Report on the Operation of Directive 90/88
Date: 1996-04-12
Institutions: European Commission
Subjects: approximation of laws, consumer credit, consumer protection, cost of borrowing, national implementing measure

COMMISSION  OF THE  EUROPEAN  COMMUNITIES 

Brussels,  l2.U4.iyyo 
COM(96) 79 final 

96/0055 (COD) 

Report  on  the  Operation  of  Directive  90/88 

Proposal  for  a 

EUROPEAN  PARLIAMENT  AND  COUNCIL  DIRECTIVE 

amending  Directives  87/102  (as  amended  by  Directive  90/88)  for  the 
approximation of the  laws, regulations and administrative  provisions of the 
Member  States  concerning consumer credit 

(presented  by  the  Commission) 

I. 

II 

Introduction and Summary 

» 

The  mathematical formula in  Directive  90/88/EEC 

1. 
2. 
3. 
4. 

Simple  interest  rate calculation 
Yearly  Compounded  Interest 
The  1 year  compounding  period: 
The  EC formula 
a) 
b) 

Present Value 
Summing  up different  calculations: the  E symbol 

1 

5 

6 
7 
8 
10 
11 
11 

III 

The  calculation  of  the  Annual  Percentage  Rate  of  Charge  in  the  EC 
13 
and the  other  members of the  EEA 

1. 

2. 
3. 

General  Observations 
a) 
b) 

Interest  and the Annual  Percentage  Rate  of  Charge 
Verbal  Definitions  of the Annual  Percentage  Rate 
of  Charge 

The Application  of the  EC formula 
The  calculation  of the Annual  Percentage  Rate  of  Charge 
in Germany  and France 
a) 
b) 
c) 

The  German  method 
The  French  method 
Comparison  of  the  EC formula  and  the 
German  and  French  methods 

4. 

Arguments  in favour  of the  EC formula 

IV. 

Elements of Cost to  be included in the calculation 

a) 
b) 

Elements  of Cost 
Situation  in the  Member  States 

V. 

Other  issues 

1. 
2. 
3. 

The  Denomination  of the Annual  Percentage  Rate of  Charge 
Accuracy 
Time definitions 

VI. 

Conclusions and  Recommendations 

Annexes: 

13 
13 

14 
15 

17 
17 
19 

21 
23 

25 

25 
25 

32 

32 
35 
36 

38 

I 
II 
III 

Articles  1 and  1a of  Directive  87/102  (as amended  by  Directive  90/88)40 
42 
National  legislation  transposing  Directive  90/88 
47 
The  different  formulae  in use  (German, French,  Finnish) 

/fn 

I. 

Introduction  and  Summary 

On  22  February  1990,  the  Council  adopted  Directive  90/88  amending 
regulations  and 

1. 
Directive  87/102 
administrative  provisions  of  the  Member  States  concerning  consumer  credit". 
This  Directive  entered  into force  on  31  December  1992. 

the  approximation  of 

laws, 

"for 

the 

2. 

Pursuant  to Article  1a5b  of the  amended  Directive, the  Commission  must: 
"submit  to  the  Council  a  report,  accompanied  by  a  proposal,  which  will 
make  it  possible  in  the  light  of  experience,  to  apply  a  single  Community 
mathematical 
rate  of 
charge". 

the  annual  percentage 

for  calculating 

formula 

Pursuant  to  Article  1a(5)(c),  the  Council  shall  "acting  by  a  qualified  majority  on 
the  basis  of  the  proposal  from  the  Commission,  take  a decision  before  1 January 
1996". 

Background1 

for 

The 

first  Consumer  Credit  Directive,  Directive  87/102/EEC 

the 
3. 
approximation  of  the 
laws,  regulations  and  administrative  provisions  of  the 
Member  States  concerning  consumer  credit2,  introduced  the  principle  that  a 
the  calculation  of  the  "annual 
uniform  method  should  be  established 
percentage  rate  of  charge".  Although  the  principle  was  established,  the  method 
was  left  open. 
Following  discussions  with  government  experts,  the  Commission 
presented  a  proposal  for  a  Directive3,  later  amended4,  to  regulate  not  only  the 
mathematical  aspect  but  also  the  elements  to  be  included  in  the  calculation. 
Directive  90/88  was  adopted  by  the  Council  on  22  February  1990.  The  Directive 
introduced  a  Community  method  of  calculating  the  "annual  percentage  rate  of 
charge"  for  consumer  credit  and  defined  the  credit  cost  items  to  be  used  in  the 
calculation  by  indicating  those  costs  which  were  not  to  be taken  into  account5. 

for 

All  Member  States  were  to  ensure,  at  least,  that  only  one  mathematical 
4. 
formula  for  the  calculation  of  the  "annual  percentage  rate  of  charge"  was  in  use 
in  their  territory.  For  a  transitional  period  until  1  January  1996,  those  Member 
States  which  used  a  different  mathematical  formula  for  the  calculation  of  the 
"annual  percentage  rate  of  charge"  (prior  to  1  March  1990)  were  permitted  to 
continue  to  do so. 

For  further  detail  on  the  background  to  Directives  87/102  and  90/88,  see  Chapter  2  of 
the  Report  on  the application  of Directive  87/102:  COM(95)117  of  11.05.95 
OJ  L 42 of  12.2.87,  p. 48 
OJ  C  155  14.6.88 p.10 

4 

OJ  C  155 23.06.89  p. 4 

Recital  3,  Directive  90/88 

5. 
Directive  90/83  was  incorporated  into  the  Agreement  on  the  European 
Economic  Area  (EEA)  and  this  Report  therefore  covers  Iceland,  Liechtenstein 
and  Norway  as well as the  15 members  of the  European  Union. 

6. 
Pursuant  to  the  obligation  in Article  1a(5)(b)  on  the  Commission  to  present 
to the  Council  "a  Report,  accompanied  by  a  proposal" which  will  make  it  possible 
to  definitely  apply  a  single  Community  mathematical  formula  for  calculating  the 
"annual  percentage  rate  of  charge",  the  Commision  hired  a  consultant  expert  in 
financial  mathematics  to  carry  out  a  study  of  the  application  of  Directive  90/88  in 
the  Member  States  of the  European  Community  and  other  members  of the  EEA6. 
Meetings  and  contacts  with  government  experts  also  took  place  between  April 
1995  and  January  1996.  On  the  basis  of  the  results  of  the  above  study,  other 
studies  of  the  transposition  of  the  Directive  into  domestic  law7,  and  particularly 
the  results  of  contacts  with  governmental  experts,  the  Commission  presents  the 
present  Report  which  is accompanied  by a proposal  for  a  Directive8 which  will 

"make  it  possible,  in  the  light  of  experience,  to  apply  a  single 
Community  mathematical 
the  annual 
percentage  rate  of charge". 

for  calculating 

formula 

7.  While  the  Directive  requires  an  evaluation  and  a  report  which  "...will  make 
it  possible,  in  the  light  of  experience,  to  apply  a  single  Community  mathematical 
formula...",  this  requires  an  examination  of  other  issues  than  the  mathematical 
formula  alone,  in order  to  define  a uniform  application  of the formula. 

Conclusions  of the  Report9 

8. 
Transposition  of  the  Directive  has  been  completed  in  the  majority  of 
Member  States  of  the  European  Community  and  other  members  of the  EEA.  The 
formula  contained  in  Annex  II  of  the  Directive  is  presently  in  use  in  all  Member 
States  of  the  European  Community  and  other  members  of  the  EEA,  with  the 
exception  of  Germany,  France10 and  Finland. 

Study  of  the  method  of  calculation  of  APR  in  EEA  States, Contract  A0 2600/94/000101. 
Available  at  DG  XXIV. 

See  footnote  3  of  COM(95)117,  Report  on  the  operation  of  Directive  87/102/EEC  on  the 
approximation  of  the  laws,  regulations  and  administrative  provisions  of  the  Member 
States concerning  consumer  credit 

While  the  term  'Decision'  is  used  in  Article  1a5c,  this  is  not  a  'Decision'  as  defined  by 
Article  189 of  the Treaty  but  rather,  since  its  objective  would  be  to  require  Member  States 
to  change  their 
in  the  Explanatory 
Memorandum  which  accompanies  the  proposal for  a Directive. 

This  is  further  explained 

laws,  a  Directive. 

9 

10 

Chapter  VI  infra 

See Annex  II of this  document 

9. 
Concerning  the  verbal  definition  of  the  "annual  percentage  rate  of  charge" 
(APR),  some  linguistic  amendments  are  required  to  the  English  and  Greek 
language  versions  of Article  1a(1)(a). 
Although  following  the transposition  of the  Directive  by the  Member  States, 
10. 
the  elements  included  in  the  term  are  not  totally  identical,  such  identity  would  in 
fact  be  desirable  for  reasons  of  transparency.  However,  bearing  in  mind  that 
much  effort  has  been  expended  in  communicating  to  consumers  the  meaning  of 
the  terms  presently  used  in  each  Member  State,  it  does  not  seem  appropriate  to 
propose  a  change  in  the  wording  used  in  the  different  languages.  Nevertheless, 
it  is  desirable  that  a  common  feature  be  included  in  order  to  enable  consumers, 
terms  as  being 
particularly 
equivalent  to  those  in  use  in  their  own  Member  States.  Following  discussions 
with  government  experts,  and  in  accordance  with  the  principles  of  proportionality 
and  subsidiarity,  it  is  proposed  that the  use  of  a  symbol  in  addition  to  the  existing 
term  will  be  required.  This  symbol will  be  identical  in  each  Member  State.  This 
will  not  constitute  a  change  in  the  language  of  the  term  and  will  only  involve  a 
small  additional  cost for transposition. 

in  crossborder  situations, 

to  recognise 

these 

11. 
As  far  as  the  mathematical  formula  is  concerned,  it  has  been  confirmed 
that  the  formula  in  Directive  90/88  is  the  only  correct  formula  and  it  is  therefore 
recommended  that  it  should  be  retained  and  made  definitely  general  throughout 
the  Member  States  of  the  European  Community  and  the  other  members  of  the 
EEA. 

As  regards 

the 
the  elements  of  cost  which  should  be 
12. 
calculation  of  the  annual  percentage  rate  of  charge,  the  transposition  of  the 
Directive  has  led  to  a  situation  where  there  is  a  harmonised  minimum  level  of 
protection  for  all  consumers  throughout  the  European  Community  and  the  other 
their 
members  of  the  EEA.  As  Member  States  report  few  problems  with 
operation,  and  as  any  differences  that  do  result  are  minimal  in  nature,  it  is  not 
proposed  to  amend the  list  of exemptions  in Article  1a(2)  at this time. 

included 

in 

13.  Accordingly,  a  draft  Directive  is  proposed  at  the  same  time  as  this  Report, 
dealing  with the following  amendments  to  Directive  90/88: 

the  requirement  to  use,  in  addition  to  the  term  "annual  percentage 
rate  of  charge",  a  common  logo  (symbol)  which  will  be  identical  in 
each  Member  State 
the  deletion  of  Article  1a(5)  in  order  to  remove  the  transitional 
measure  and 
this  Report  and  associated 
to 
the 
legislative  proposal 
the  deletion  of Article  1a(3)  as this  measure  has  not  been  availed  of 
by  any  Member  State11 

references 

11  No  objections  were  received  from  Member  States  to  this  proposal  at  the  meeting  in  April 

1995  (paragraph  6 supra)  or since. 

the  insertion  in  Annex  II  of  the  Directive  of  a  requirement  to  use 
accuracy  to two decimal places -  and any associated  amendment to 
Annex  III 
the  insertion  in Annex  II  of the  Directive  of  a  requirement  to  use  a 
365  or 366 day year  - and any associated  amendment to Annex  III 
linguistic  changes  to  the  English  and  Greek  language  versions  of 
the  Directive  at Article  1a(1)(a) 

14.  As  regards  other  substantive  elements  of  Directive  90/88/EEC,  any 
proposals  for  amendments  in  this  regard  would  be  considered  together  with 
possible  proposals  following  the  outcome  of  the  consultation  on  the  Report  on 
the operation of Directive  87/10212. 

12  Footnote  1 supra 

II 

The  mathematical  formula  in  Directive  90/88/EEC 

15.  Directive  90/88  introduced  a  common  method  for  the  calculation  of  the 
"annual  percentage  rate  of  charge"  into  the  requirement  of  price  disclosure  in 
consumer  credit  already  contained  in  Directive  87/102/EEC.  The  intention  was 
that  the  annual  percentage  rate  of  charge  should  add  a  commonly  defined  and 
acknowledged  element  of  price  disclosure  to  consumer  credit,  making  its  price 
comparable  throughout  the  EC  as  well  as  between  different  forms  of  consumer 
credit. 

The  Directive  defined  the  mathematical  procedure  for  calculating  the 
16. 
annual  percentage  rate  of  charge  as  well  as the  elements  of  cost  to  be  included 
in  the  calculation13. 
In  addition,  several  assumptions  were  made  for  certain 
forms  of  consumer  credit  e.g.  open-ended  credit  that  does  not  provide  all  the 
information  necessary  to  calculate  the  annual  percentage  rate  of  charge  at  the 
time  of  conclusion  of the  contract. 

The  verbal  definition  of  the  "annual  percentage  rate  of  charge"  is  as 

17. 
follows: 

"the  total  cost  of  the  credit  to  the  consumer,  expressed  as  an  annual 
in 
percentage,  of 
accordance  with Article  1a"u 

the  amount  of  the  credit  granted  and  calculated 

and 

"which  shall  be  that  equivalent,  on  an  annual  basis,  to  the  present  value 
of  all  commitments  (loans,  repayments  and  charges),  future  or  existing, 
agreed  by 
in 
accordance  with the mathematical formula set out in Annex  //"15 

the  borrower,  shall  be  calculated 

the  creditor  and 

18. 
This  verbal  definition  is  expressed  in  a  mathematical  definition  found  at 
Annex  II  of  the  Directive.  The  Annex  clarifies,  in  mathematical  terms,  those 
obligations  which  shall  be  made  equal  in their  present  values  through  the  annual 
percentage  rate of  charge. 

19. 
All  the  mathematical  formulae  currently  in  use  in the  European  Community 
and  the  other  members  of  the  EEA  for  the  calculation  of  the  annual  percentage 
rate  of  charge  are  basically  derived  from  the  same  principles  of 
interest 
calculation16. 
National  deviations  which  lead  to  different  forms  of  and 
results  from  the  formulae  applied  do  not  derive  from  mathematical  origins 

13 

14 

15 

16 

Chapter  IV infra 

Article  1.2(e) of  Directive  87/102  (as amended  by  Directive  90/88) 

Article  1a(1)(a)  of  Directive  87/102  (as  modified  by  Directive  90/88) 

Annex  III of this  Report 

but  rather  from  differences  in  the  assumptions  applied  to  the  calculations 
in  certain  Member  States.  Were  these  assumptions  identical,  so  too  would  be 
the  results. 

20. 
At  this  point  an explanation  is  necessary,  in  simple  mathematical  terms,  of 
the  operation  of  the  mathematical  rules,  both  in  order  to  understand  the  rules 
themselves  and,  more  importantly,  the  other  forms  of  calculation  (the  German, 
French  and  Finnish17  methods)  which  lead  to  different  results  as  a  result  of 
differences  in basic  assumptions. 

1. 

Simple  interest  rate  calculation 

21. 

The  price  of a credit  is defined  by the  combination  of three factors: 

the  capital borrowed 
the  charges  or costs  applied 
the time  in which  a capital can  be  used by 
the  borrower 

(AK) 
(CK) 

(tK) 

22. 

The  interest  rate  (i)  is therefore  expressed  by the equation: 

Charges  (CK) 

i  = 

Capital (AK)  * Time (tK) 

23. 
Using  the  convention  that  interest  rates  are  expressed  in  relation  to  100 
currency  units  (%)  and for  a time  period  of one year  (p.a.),  the  equation  reads  as 
follows: 

i  %p.a.  = 

Charges  (CK)  *  100 *  1 year 

Capital (AK)*  Time  (tKjnyears) 

24. 
If  time  is  calculated  in  months,  then  "1  year"  in  the  upper  part  of  the 
formula  must  be  replaced  by  "12  months".  Therefore  130.66  ECU  for  a  loan  of 
1,000  ECU for  one year  amounts  to  an  interest  rate of 

1 3 0 , 6 6 * 1 0 0 / 1 , 0 0 0 *1  =  13.066  % p.a. 

17  Finland  has  availed  of  Article  1a5a  to  retain  a  formula  different  to  that  in  the  Directive. 
Once  a  single  formula  is  confirmed  for  use  throughout  the  EC,  it  is  prepared  -  according 
to  declarations  from  Government  representatives  -  to  adopt  this  formula  -  the  derogation 
is  not  for  reasons  of  principle  but  to  avoid  having  to  enact  two  possibly  different  laws  in a 
short  space  of time.  Finnish  legislation  does  require  the disclosure  of APR. 

2. 

Yearly  Compounded  Interest 

25. 
In the  simple  formula  (cost  divided  by  capital  and  time)  no  compounding  is 
foreseen.  While  banks  always  receive  their  interest  by  the  end  of  the  credit 
contract  period,  a  bank  which  receives  interest  payments  before  the  end  of  this 
period  can  reinvest  this  money  and  thus  earn  additional  interest. 
In  this  way,  the 
real  charges  in  the  example  given  would  be  not  only  the  200  ECU  after  18 
months  but  also  the  additional  13.333%  on  130.66  ECU  (reduced  by  the  amount 
that  early  payment  would  cost the  borrower). 

Thus  the  simple  interest  rate  does  not  match  the  real  cost  but  produces  a 
26. 
higher  amount  of  charges  than  the  consumer  has  consented  to.  In  other  words, 
the  annual  percentage  rate  of  charge  of  different  consumer  credit  contracts  are 
not  comparable  if  the  period  during  which  interest  is  compounded  is  not  also 
equal. 

27. 
Taking  the  first  example  from Annex  III  of  the  Directive,  where  the  lifetime 
of  such  a  loan  is  not  exactly  1 year  but  rather  18  months,  with  charges  of  200 
ECU, the  traditional  simple formula  would  produce  the following  result: 

200*  100*  12 

1.000*  18 

=  13.333  % p.a. 

The  example  given  in the Annex,  however,  states  that  the  result  should  be 
28. 
13.066  %  p.a.  The  reason  for  this  difference  lies  in the  fact  that  credit  contracts 
for  different  time  periods  are  incomparable  without  a  uniform  decision  about  what 
to  do  with  the  interest  earned  after  a  certain  time  period.  To  use  financial 
interest  should  be 
mathematics 
"compounded". 

the  question 

is  at  which 

terms, 

time 

The  definition  of  an  interest  rate  with  reference  to  1 year  therefore  means 
29. 
not  only  that  all  interest  rates  are  expressed  as  "p.a."  (which  means  that  the 
lifetime  interest  rate  of  a credit  is divided  by the  number  of  months  and  multiplied 
by  12)  but that  the  compounding  period  for the  credit  should  be  uniformly  1 year. 
The  formula  given  in  Directive  90/88  and  in  use  in the  majority  of  Member  States 
(henceforth  referred  to  as  the  EC  formula)  fulfils  this  condition. 
The  French 
method  of  calculation  does  not  recognize  this  condition  at  all, thus  giving  rise  to 
The 
arbitrary  compounding  periods  which  in  practice  amount  to  1  month. 
German  "Rule  of  360"  accepts  a  compounding  period  of  1 year,  in  principle,  but 
deviates  from  it  in  every  case  where  interest  has  to  be  calculated  for  less  than  a 
year,  especially  if the  lifetime  of  the  credit  does  not  amount  to  exactly  1 or  more 
The  reason  is  that  calculating  interest  rates  with  a  compounding 
full  years. 
period  of  1 year  is  not  possible with the simple formula  given  above. 

30. 
Criticisms  have  been  voiced  about  the  complexity  of  the  EC  formula  and 
In  this  context,  it  should  be  noted  that  the 
the  need  for  technical  expertise. 
simple  formula  can  only  be  used  for  a  period  during  which  the  capital  borrowed 

In the  case  of  credit  with  monthly  repayments,  the  accurate 
remains  constant. 
require  an 
calculation  of 
approximation  of  many  different  calculations  which,  although  simple 
in 
themselves,  would  need  to  be  reiterated  so  many  times  that  technical  assistance 
would  also  be required. 

the  annual  percentage 

rate  of  charge  would 

As  will  be  shown  below,  the  EC  formula  which  is  at  present  successfully 
31. 
used  in  the  large  majority  of  Member  States,  is  merely  the  more  developed  form 
of  earlier  formulae  (in  order  to  take  more  variables  into  account)  and  is  more 
convenient  and  accurate  to  use than the other  methods  presently  in use. 

3. 

The  1 year  compounding  period: 

32.  As  the  compounding  of  interest  is  an  integral  part  of  the  calculation  of 
interest,  one  must  already  "know"  the  interest  rate  in  order  to  use  the  simple 
formula  (to  calculate  that  interest  rate)  since  the  first  year's  interest  must  be 
added  to  the  capital  which  will  bear  interest  in the  subsequent  period  (e.g.  in  our 
example,  in  the  remaining  six  months  in  a  credit  of  18  months  duration).  The 
interest  rate  can  no  longer  be  directly  calculated  but  is  calculated  as  a  growth 
rate  (i)  of the  original capital. 

33.  An  interest  rate  of  13.066% thus  increases  by  (1 + i ) of the  original  capital 

(1  +0.13066)  = 1.13066 

1,000  ECU  amounts  to  1,000  *  (1  +  0.13066)  =  1,130.66  ECU  after  one 

year. 

34. 
This  is  also  referred  to  as the  "future  value"  of a capital  as  it  describes  the 
growth  rate  after  a  certain  time  period  has  passed.  The  amount  can  also  be 
considered  in terms  of "growth" rather  than  "interest",  as the  growth  can  easily  be 
Interest  is  the  difference  between  the  original  capital  and  its  future 
calculated. 
value  after  this growth. 

In  the  case  of  a  credit  which  is  repaid  in  total  after  two  years,  the  same 
35. 
result  is  achieved  with  the  EC  formula  or  the  French  or  German  formulae.  The 
German  and the  French  methods  apply the  simple formula  in two  steps: 

Year  1 
Year  2 

Capital, 
Capital2 

= 
= 

Capital + (Capital * i) 
Capital  +  (Capital  *  i)  +  [Capital  +  (Capital 
* i)] *  i 

Using  the  above  example,  another  0.13066  *  1,130.66  ECU  =  147.73  ECU  for 
the  interest  of  the  second  year  should  be  added  to  the  1,130.66  ECU,  producing 
a  result  of  1,278.39 ECU. 

The  EC  formula,  on  the  other  hand,  merely  simplifies  the  equations  in  a 

36. 
still familiar  way  using  simple  algebra: 

Capital, 
Capital2 

= (1 + i)  * Capital 
= (1  + i) * (1 + i) * Capital 
=  (1  + i)2  * Capital 

This  simple  form  is  directly  calculable  with  calculators  or  computers  using  the 
In  our  example,  (1  +  0.13066)2  *  1.000 
exponential  form  of  the  same  formula. 
ECU =  1,278.39  ECU.  In the  same  way,  after  three  years, the  formula  would  be 
(1 + i)3 * capital  and  after  t years,  capital, = capital  * (1 + i)'. 

Thus  the  same  result  is  achieved  by  the  different  formulae,  though  in  a 
37. 
simpler  way  using  the  EC  formula. 
However,  this  simplicity  is  not  the  main 
advantage  -  the  formula  can  also  be  applied  to  fractions  of  a  year  because  "t" 
expressed  in  years  should  properly  be  expressed  as  "t/1"  which  means  that  t 
supposes  a  compounding  period  of  1 year.  If  we  express  "t"  in  terms  of  months 
then  "t"  would  be written  as "tmonth/12". 

38.  A  capital  of  1.000  ECU  for  6  months  lent  out  at  a  rate  of  12%  p.a.  would 
grow  to 

capital6  =  1-000 * (1  +  0,12)6/12  =  1,000  *  1,121/2 =  1,058.30052  ECU 

In the  same  way,  instead  of 6/12, this  could  be expressed  as  182/365  days 

capital182  =  1,000  * (1 + fj,12)182/365  =  1,000  *  1,12182/365  =  1,058.13624 18 

39.  An  interest  rate  of  12% p.a.  earns  58  ECU  interest  in  a six  month  period  if 
interest  is  compounded  annually.  While  58  ECU  is  less  than  half  the  interest  the 
bank  would  have  earned  after  1  year,  because  this  interest  is  being  paid  out 
earlier  than  foreseen  in  the  compounding  period,  the  bank  can  invest  these  58 
ECU  for  12%  for  the  remaining  six  months,  with  a  future  value  of  2  ECU,  thus 
matching 
if 
compounding  occured  at  the  end  of the  compounding  period  (1  year).  This  result 
cannot  be  achieved  with  the  older  methods  of  calculation  still  in  use  in  France 
and  Germany. 

that  would  have  been  reached 

the  60  ECU  for  six  months 

40.  Using  the  German  method,  an  interest  rate  of  12%  p.a.  on  a  capital  of 
If fractions  of  a  year  are 
1.000  ECU  would  yield  exactly  60  ECU  for  six  months. 
involved,  the  simple  form  either  fails  to  produce  a  result  or  does  so  by  deviating 
from  the  underlying  compounding  period  of  1  year  e.g.  by  reducing  it  to  6 
months,  in  this  case.  Instead  of  p.a.,  it  would  be  more  accurate  to  describe  it  as 
6%  per  half  year. 

18  The  resu't  is  slightly  different  because  a 365 day year  does  not divide  evenly 

9 

41. 
In fact,  the  French  method  states  that  a  rate  of  6%  for  a  half  year  may  be 
multiplied  by  2  to  reach  the  annual  percentage  rate  of  charge.  The  compounding 
period  in  France  is  therefore  regarded  as  unimportant  and  can  be  arbitrarily 
convened  through  the  repayment  periods  (which  in  the  case  of  consumer  credit 
are  normally  monthly).  The  French  method  therefore  usually  uses  a  monthly 
compounding  period. 

In  Germany,  on  the  other  hand,  the  annual  compounding  period 

42. 
is 
prescribed  as  a  rule.  However,  in  order  to  avoid  exponential  calculation,  it 
deviates  from  this  rule  for  the  last  year  of the  life  of  a credit  if  this  year  does  not 
amount  to  exactly  12  months.  Consumer  credit  contracts  with  a  lifespan  of  less 
than  a year  are  therefore  equally  misrepresented  in  the  German  and  the  French 
calculations  of  the  annual  percentage  rate  of  charge.  The  results  differ  from 
each  other  significantly  if the  life-span  is more than  a year19. 

43.  Given  the  express  intention  in  Directive  90/88/EEC  that  a  single  formula 
for  the  calculation  of  the  annual  percentage  rate  of  charge  should  be  used  in 
order  to  facilitate  the  comparison  between  credit  offers  from  different  countries, 
the  conditions  of  calculation  must  be  uniform.  One  of  the  most  basic  conditions 
is  that  each  annual  percentage  rate  of  charge  should  be  calculated  on  the  basis 
of the  same  compounding  period  of  1 year. 

44.  Only  the  mathematical  formula  in  Directive  90/88,  in  use  in  the  majority  of 
Member  States, 
this  condition  and  produces  comparable  annual 
percentage  rates  of charge . 

follows 

4. 

The  EC formula 

45. 

The  simplest  form20 of this  mathematical  formula  is 

V  =AK  *(1+i)' 

where 

AK 

AK 
i 
t 

is the  initial  loan  augmented  with  all  charges  and  interest  at  the  end  of  the 
credit's  lifespan 
is the  initial  loan 
is the  interest  rate expressed  p.a.  (but  not  in  percent) 
is the  lifespan  of this  loan 

46. 
It  might  have  been  closer  to  traditional  legal  understanding  if  the  Directive 
had  put  emphasis  on  the  total  cost  (C)  of  a  credit  instead  of  its  'present  value', 

19  Table  at  paragraph  86 infra 

20  This  form does  not,  in  practice,  fully  take  into  account  all  elements  of  a  transaction 

10 

although  the  mathematical  meaning  would  have  been  the  same, 
using  total  cost  C would then  have  been: 

The  formula 

Extended  Capital  + Total  Cost 

Extended  Capital  multiplied  by 
growth  rate  in the time  period 

the 

AK  + C 

AK  *(1+i)t 

47. 
The  annual  percentage  rate  of  charge  is  the  factor  which  represents  the 
growth  of  an  initial  capital, taking  into  account  all  charges  for  a  given  time  period 
with  annual  interest  compounding  expressed  as  a  percent  per  annum.  The 
calculation  is  based  on  real  time,  with  daily  precision  where  loans,  repayments 
and  charges  are  debited  or  credited  to  the  debtor.  For  the  sake  of  accuracy, 
therefore,  the  results  should  be  expressed  to  an  accuracy  of  2  decimal  places 
and the  year  shall  be expressed  as  having  365 days21. 

a) 

Present  Value 

The  present  value  of  all  repayments  and  charges  in  consumer  credit  is 
48. 
normally  the  initial  loan.  This  means  that  if  all  charges  expressed  by  the  growth-
rate  are  subtracted,  the  principal  (the  original  capital)  will  remain.  For  most 
normal  calculations,  as  expressed  in  the  examples  of  Annex  III  of  Directive 
90/88,  the  above  formula  would  be  sufficient.  But  where  there  are  deviations  in 
practice  e.g.  with  a  loan  being  paid  out  later  than  the  date  of  the  contract  (or 
more  precisely  the  date  on  which  interest  is  calculated),  the  amount  of  the  loan 
would  already  include  interest.  The  amount  of  the  loan  would  therefore  have  to 
be  used  in  the  calculation  with  its  present  value. 
The  EC  formula  therefore 
takes  into account  the  present  value  of a loan in the following form: 

AK 
( l + i )c 

A  K 
( l + i ) *-

If the  loan  is paid out  at the  beginning  of the  calculation, t  is 0 

b) 

Summing  up  different  calculations: the E symbol 

49.  Most  consumer  credit  contracts  do  not  take  the  simple  form  of  a  once  off 
repayment  at the  end  of their  lifespans  but are paid  back  in  instalments. 

50.  As  the  above  mentioned  formula  (and  the  simple  formulae  in  use  in 
France  and  Germany)  presupposes  a  constant  interest  bearing  capital  for  "t", 

21  Table at Paragraph 125 infra 

11 

each  credit  must  be divided  into  as  many  credit  transactions  as  changes  occur  in 
the  interest  bearing  capital. 

Therefore  the  annual  percentage  rate  of  charge  is  only  correct  if  it  is  used 
51. 
equally  in  all  individual  calculations  and  if  the  sum  of  all  present  values  (  £  )  is 
equal  to  the  sum  of  the  present  values  of  the  loans  or  if  the  growth  of  the  loan 
expressed  as  one  single  growth  rate  is  equal  to  all  the  charges  and  costs 
incurred, whether  in the  present  or  in the future. 

This  is  the  formula  used  in  the  Directive,  employing  the  z  symbol  to 
52. 
is  also  the 
indicate  that  a  sum  is  to  be  made  out  of  multiple  calculations.  It 
formula  used  in  all  Member  States  of  the  European  Community  and  other 
members  of the  EEA with the  exception  of Germany,  France  and  Finland. 

12 

Ill 

1. 

a) 

The  calculation  of  the  annual  percentage  rate  of  charge  in  the  EC  and 
other  members  of the EEA 

General  Observations 

Interest  and  the  annual  percentage  rate of  charge 

53.  Creditors  calculate  the  price  of  credit  in  numerous  ways  and  under  many 
different  names22. 
Although  there  are  some  general  guidelines  concerning  the 
way  in  which  charges  for  consumer  credit  are  calculated,  the  definitions  are  far 
from  uniform.  Usually,  creditors  distinguish  between  "once-off  costs"  (one  time 
only  costs)  such  as  fees  and  charges,  and  "interest"  (variable  or  time  costs  that 
comprise  all  those  charges  which  increase  over  the  duration  of  the  credit). 
Some  banks  put  more  emphasis  on  the  (nominal)  interest  rate,  others  on  fees. 
The  method  of  distinguishing  between  fees  and  interest,  and  the  methods  of 
interest  calculation  differ  not  only  between  countries  but  also  from  one  creditor  to 
another.  Sometimes  this  is due  to the  internal cost  benefit  calculation  of  a  bank, 
institutions 
or  the  fact  that  the  creditor  must  share  the  profits  with  other 
(brokerage  fees,  insurance  premiums),  or  to  facilitate  the  individual  calculation  of 
the  cost  of the  credit  by third  parties  (intermediaries  or  brokers). 

54.  National  law  usually  assumes  that  creditors  are  free  to  choose  any 
appropriate  and  non-arbitrary  method  to  define  the  cost  of  a  particular  credit. 
The  only  requirements  are transparency  and  completeness  in the  list  of  charges. 
In  some  countries,  there  is  an  exception  to  the  arbitrariness  of  the  definition  of 
the  nominal  interest  rate,  in  connection  with  the  requirements  of  Article  8  of 
Directive  87/102  (early  repayment).  This  article  requires  national  rules  for  the 
calculation  of  an  equitable  reduction  in the  cost  of the  credit.  Some  countries  fix 
percentages  of  the  total  cost  to  be  refunded23  while  others  state  that  the  rebate 
should  concern  only  "time  costs"  which  are  expressed  by  the  nominal  interest 
The  situation  varies  from  State  to  State25,  as  does  the  definition  of 
rate24. 

22 

23 

24 

25 

A  1984  survey  revealed  that  the  term  "interest"  was  used  in  13 different  ways  in  Germany 
internal 
It  should  be  noted  that  this  arbitrary  use  of  terms  only  concerns 
alone. 
calculations,  not the  legally  prescribed  disclosure  of the APR. 

In  France,  this  is  three  times  the  contracted  amount  for  the  next  payment,  and  then 
reverts.  Décret  90-979  of  31.10.90  (Article  L311-29) 

The  notion  of  "interest"  in  the  rules  on  price  disclosure  must  be  distinguished  from 
"interest"  as  used  in  restrictive  rules  on  the  refund  of  time-connected  charges  (e.g. 
anatocism  or  "interest  on  interest"),  where  courts  do  not  interfere  directly  with  the 
definition  of  nominal  interest  in  the  contract  but  rather  recalculate  the  part  of  the  cost  for 
rebate  by  using  their  own definition  of  interest. 

In  Germany  the  Supreme  Court  has  held  that  a  "disagio"  was  to  be  considered  not  as  a 
once-off  fee  but  as  hidden  interest  and  therefore  to  be  partially  refunded  in  the  event  of 
early  repayment.  Bundesgerichtshof,  16.11.93, XI ZR  30/93 

13 

"equitable".  The  rule  usually  used  for  such  calculations  is  the  "Rule  of  78"26 
which 
in  small  credit 
transactions. 

is  inaccurate,  but  acceptable 

is  generally  agreed 

it 

55. 
The  Directive  did  not  interfere  with  the  methods  of  calculation  of  early 
repayment  already  in  use  or  with  the  definitions  of  interest  used  internally  in 
contracts.  As  far  as  interest  was  concerned,  the  Directive  aimed  to  harmonise 
the  notion  of  interest  as  it  is  used  in the  "interest  rate" for  price  disclosure,  i.e.  to 
state  a  uniform  requirement  to  disclose  the  result  of  this  cost  calculation  in  a 
Community-wide  comparable  credit  price - the annual  percentage  rate  of charge. 

56. 
In  this  respect  all  Member  States  are  in  agreement  -  no  State  leaves  it  to 
the  discretion  of  the  contractors  to  define the  method  of  calculation  of the  annual 
percentage  rate  of  charge  or  the  elements  to  be 
included  although,  as  we  have 
seen,  France  and  Germany  have  left  some  arbitrary  elements  insofar  as  creditors 
may  influence  the  annual  percentage  rate  of  charge  by  choosing  special  life 
spans for their  credit  contracts. 

57. 
The  form  of  the  regulation  varies.  Most  countries  do  not  simply  transcribe 
the  verbal  form  of  the  calculation  into  their  law  but  leave  its  mathematical 
definition  to  administrative  bodies. 

b) 

Verbal  Definitions  of the  annual  percentage  rate  of  charge 

58.  Directive  90/88  defines  the  annual  percentage  rate  of  charge  directly  by 
the  method  of  its  calculation,  while  Directive  87/10227  presupposed  a  definition. 
National  legislation  distinguishes  between  the  definition  of  the  annual 
percentage  rate  of  charge  and  the  method  of  its  calculation,  using  the 
traditional  relationship  between  time,  cost  and  capital  expressed  on  an  annual 
basis  in  percent  as  the  most  important  element  of  definition  followed  by  the 
method  of  its calculation28. 

26 

27 

28 

Accurately  defined  in  Section  2.510  of  the  US  Consumer  Credit  Code  Regulation  Z 
In 
§226.8(b)(7),  the  "Rule  of  78" takes  its  name  from  the  sum  of  the  digits  1 through  12. 
the  first  month,  the  creditor  earns  12/78ths  of  the  agreed  interest.  After  2  months,  the 
creditor  has  earned  23/78ths  i.e.  the  first  12/78th  plus  11/78ths... 
The  formula  wherein 
the  time  periods  are  expressed  as  months  defines  those  parts  of  the  total  interest  earned 
which  must  be refunded  as follows: 

frest  of  lifetime  in  months  + 1)*rest of  lifetime]  * total  interest 
(lifetime  in  months  +  1 )*lifetime  in  months 

For  commentary,  see  German  Bundesgerichtshof  Neue  Juristische  Wochenschrift  1979 
p. 542. 

Article  1.2e  of  Directive  87/102, amended  by  Directive  90/88 

Annex  II  of  this  Report  contains  a  list  of  and  brief  analysis  of  national  transposing 
legislation 

14 

°  Denmark29  requires  the  statement  of the  "annual costs  in  percent" 
0  Germany30  defines  the  "initial  effective  interest  rate"  as  "the  total  amount  of 
charges  expressed  as an annual  percent  rate  of the  net  capital  or  cash price" 

°  Spain31  defines 

the  "annual  equivalent  rate"  as  the 

total  cost  of  credit 

expressed  as  an  annual  percentage  of the  capital  lent" 

0  France  defines  the  rate as  the "global  effective  rate" 
° 

Ireland32  defines  the  rate  as  the  total  cost  of  credit  expressed  in  an  annual 
percentage  of the  amount  of credit  given  ..." 

°  The  Italian33 and  Portuguese34  laws  use a similar  definition 
0  The  Netherlands35  defines  an  "effective  credit  remuneration  percentage  on  a 
year-basis  as  the  reward  for  the  credit  according  to  the  agreement,  expressed 
as  a  percentage  for  a year  of the  open  balance" 

0  Sweden36  defines  the  "effective  interest"  as  "the  credit  cost  to  the  consumer, 
expressed  as  an  annual  rate  in  percent  of  the  amount  of  the  credit  granted, 
where  the  instalment  payments  made  during  the  life  span  of  the  loan  have 
been  appropriately  taken  into  account." 

Similar  definitions  can  be  found  in  the  other  Member  States.  The  UK37 

is 
59. 
the  only  State  to  refer  to  the  compounding  period:  "The  annual  percentage  rate 
of  charge  is  a  rate  per  annum  compounding  annually  expressed  as  a  percentage 
such  that  a)  the  sum  of  present  values  as  at the  relevant  date  of  all  repayments 
of  credit  and  the  total  charge  for  credit;  and  b)  the  sum  of  present  values  as  at 
the  relevant  date  of  all  credit  under  the  agreement  would,  when  calculated  at 
that  rate  be  equal."  Austria  combines  both  definitions  in  one  article38  and 
defines  the  annual  percentage  rate  of  charge  as  the  "decursive  percentage  rate 
for  a full  year  which  establishes  numerical  equality  between  the  sum  of the  credit 
paid  out  and  the  sum  of  all  payments  ..."  and  provides  the  explanation  that  "It 
expresses  the  total  cost  of credit  in  relation to the  credit  granted  ..." 

29  Art.  9.1.4,  1990/398  Lov om kreditaftaler  of  13.6.90 

Art.  4 alinéa  2 of the Verbraucherkreditgesetz  of  17.12.90 

31  Art.  18  b of the  Ley de crédito  al consumo of  23.03.95 

32  Consumer  Credit  Act  1995, s.9 

33  Art.  19  Legge  Communitaria  142 of  19.2.92 

34  Art  2,  al  (a)  Decreto-Lei  of  21.09.91 

35  Art  1.2  k Wet  op  het consumentenkrediet  of  04.07.90 

36  Art  2  Konsumentkreditlag  830 of  1992 

37  Statutory  Instrument  on Consumer  Credit  Regulation  1980/51 Art.  9 al. 1 

38  Title  VIII,  Art.  33 al. 4 of  Bankwesengesetz  1993/532 

15 

2. 

The Application  of  the  EC formula 

60.  With  the  exception  of  Germany,  France  and  Finland,  all  the  Member 
States  of  the  European  Community  and  the  other  members  of  the  EEA  have 
incorporated  the  EC  formula  into  their  national  legislation.  The  majority  of  them 
(except  the  United  Kingdom),  did  so  in  reaction to  the  Directive. 

61. 
In  some  cases,  the  wording  of  Article  1a  was  used  and  the  mathematical 
equation,  in  Annex  II  was  copied,  though  sometimes  the  symbols  were  replaced 
by  others  (because  it  was  felt  that  different  symbols  for  repayments  and  loans 
would  make 
literally 
to  read). 
incorporated  the  mathematical  formula  of  the  Directive.  This  is  the  case  for 
Denmark,  Greece,  Italy,  Luxembourg,  Portugal, Sweden  and  Iceland. 

Some  countries  have 

the  formula  easier 

62. 
The  remaining  Member  States  either  used  other  symbols,  elaborated 
different  examples  or  gave  more  verbal  explanations  in  the  construction  of  the 
formula  but  kept  to  the  basic  equation,  using  the  "internal  rate  of  return"  or 
exponential  growth: 

In  Belgium39,  the  "balanced  cash  value  equation"  given  in  the  Directive  is 
restated  using  different  symbols.  An  iteration  procedure  that  can  be  used 
to  solve  the  balanced  cash  value  equation  is  described  and this  procedure 
is applied  step  by  step  to  several  examples 
In  Spain40, the  formula  is developed  in two  steps  and  examples  different  to 
those  in the  Directive  are given  in the Annex 
In  Ireland41, the  conditions  and  applications  of  the  formula  are  explained  in 
words  and,  particularly,  growth  and  cash  value  as  well  as  the  iteration 
procedure  are explained. 
The  Netherlands  has  developed  "Rules  on  Effective  Credit  Yield"42  which 
elaborate  on  the  mathematical  procedures  in  some  detail.  The  "effective 
credit  remuneration  percentage  on  a year-basis"  is  developed  on  the  open 
The  calculation  of  an  open-ended  credit  is  also 
balance  of  a  credit. 
explained 
Similarly,  Austria43  uses  the  EC  formula  with  different  symbols  and  also 
developed  the  "fictitious  annual  interest  rate" for  open  end  credit 
The  UK  has  a  vast  body  of  rules  regulating  the  general  requirements  of 
the  Consumer  Credit  Act.  The  mathematical  formula  in  the  Directive  90/88 

In addition, accuracy  is also  covered 

39 

40 

41 

42 

43 

Arrêté  Royal  2311 of  04.08.92  (amended  on 29.04.93  by  1381/1993) 

Article  18a  Ley  de crédito  al  consumo,  23.03.95 

Consumer  Credit  Act  1995 

Regeling  effectief  kredietvergoedingspercentage  of 06.11.91 

Title  VIII  Art.  33 al.4  of the  Bankwesengesetz 

16 

is  restated44  and  three  examples  are  developed,  demonstrating  different 
degrees  of sophistication  in the  mathematical  procedure. 
In  Norway45,  "effective  interest"  is  calculated  with  the  same  formula  as  in 
the  Directive 

3. 

The  calculation  of  the  annual  percentage  rate  of  charge  in  Germany 
and  France 

As  mentioned  above,  the  difference  between  the  mathematical  formulae  in 
63. 
use 
the 
in  Germany  and  France,  and 
unwillingness  of  those  countries  to  use  exponential  calculation.  Mathematically, 
this 
in  a  situation  whereby  neither  country  can  apply  a  1  year 
compounding  period  for  all  circumstances. 

the  EC  formula 

lies  basically 

results 

in 

a) 

The  German  Method 

64. 
The  German  method  calculates  interest  for  12  months  and  compounds  it 
at  the  end  of  this  time  before  restarting  interest  calculations  for  the  next  12 
months.  If the  last  year  does  not  have  12 months,  interest  is compounded  earlier. 
Legally,  this  result  is  achieved  through  a  complicated  reference  scheme.  Article 
4  of  the  Consumer  Credit  Act  refers  to  Article  4  of  the  Price  Disclosure 
Regulation  which,  for  the  purpose  of  interest  calculation,  refers  to  Art.  608  of  the 
Civil  Code. 

65.  However,  Art.  608  makes  no  reference  to  "interest  calculation"  but  deals 
only  with  the  question  of the  time  at which  debtors  must  pay  interest  in the  event 
that  nothing  has  been  agreed  (in  which  case  it  establishes  a  rule  that  interest 
must  be  paid  annually  or,  if  a  credit  is  repaid  in  less  than  1 year,  at  the  time  of 
repayment).  Art.  4  of  the  Price  Disclosure  Regulation  applies  this  rule  to  interest 
calculation  by  citing  this  article  as  well  as  by  using  the  description  "cascade 
method"  (Staffelmethode). 

66. 
As  we  have  seen  above,  the  question  of  the  time  at  which  interest  is  paid 
and  the  time  at  which  it  is  compounded  are  not  linked  to  each  other  if  the 
exponential  form  of the  calculation  is used. 

44  Statutory 

Instrument  15  of  1980  The  Consumer  Credit 

(Total  Charge 

for  Credit) 

Regulations  1980 of 29.01.80, Art.  6 to 11 

45  Forskrift  til  kredittkjopsloven  of  15.07.86,  N° 1616 

17 

67. 
In practice,  the  real  source  of the  German  method  is  a  paper  by  the  Bund-
Lander-Kommission  "Preisauszeichnung"46.  Here the  method  is  explained  and  a 
formula  is  given  that  uses  exponential  forms, though  these  are  by  definition  more 
formula  because  simple  calculations  becomes 
complicated 
extremely  complicated  if  expressed  in  correct  mathematical  terms.  This  method 
is  known  as  the  "360  day  method"  due  to  its  additional  assumption  that  a  year 
has  360 days. 

the  EC 

than 

The  German  formula  poses  a  problem  not  only  for  comparisons  with 
68. 
products  in  other  Member  States  but  also  within  Germany. 
In  particular,  credit 
for  periods  of  less than  a year  deviates  significantly  if the  annual  percentage  rate 
of charge  is  stated  in the  German form. 

69. 

If a consumer  has the choice between: 
4  consecutive  credit  contracts,  each  of  3  months  duration,  with  an  annual 
percentage  rate of charge  of  12% p.a.  each, or 
one  credit  contract  of  1 year  duration  with  an  annual  percentage  rate  of 
charge  of  12.5 % 

calculated  according  to  the  German  "360  day  method",  producing  1,000  ECU  net 
capital  without  additional  costs,  the  consumer  would  have  to  pay  125  ECU  in 
interest  in the  second  case  at  the  end  of  the  year  and  30  ECU  every  quarter  in 
the  first  case.  But  if they  had  paid  the  interest  in the  first  case  at  the  end  of  the 
year  (as  in the  second  case), this  would  cost them  an extra  interest  charge  of: 

[(12%  on  30  ECU for  9 month)  + (12% on 30  ECU for  6  month)  +  (12% on 
30  ECU for  3 month)]  =  0.12  * 30 * (9 + 6 + 3)/12 
=  5.40  ECU. 

70.  Aithough  the  German  price  disclosure  regulation  was  correctly  applied,  the 
consumer  would  have  made  the  wrong  choice  if  they  had  chosen  the  "cheaper" 
credit.  12% p.a.  in fact  involves  a surcharge  of  5.40  ECU  or  an  "effective  interest 
rate"  of  12.54%. 

71. 
Thus  in  Germany,  a  consumer  contracting  for  42  months  and  another 
contracting  for  48  months  cannot  properly  compare  their  annual  percentage  rate 
of  charge  because  the  48  months  involves  compounding  periods  of  1 year  while 
the  other  uses  1 year  for  the  first  three  years  and  6  months  for  the  rest  of 
the 
life  of  the  credit.  The  German  method  is  not  "correct"  in  a  mathematical  sense 
the  rule  of  a  1 year  compounding  period  is  obviously  not  observed  in 
because 

46  An  administrative  body  which  lays  down  the  surveillance  principles  for  disclosure  in  price 
regulations.  The  reference  for  the  formula  is:  Bund-Lander  AuG.chull.es  "Preisangaben" 
Bemeinsamen Amtsblatt  des  Landes  Baden-Wurttemberg,  seite  27,  05/02/93 

all  cases,  and  calculations  that  are  based  on  different  general  assumptions  and 
conditions  are  not equal47. 

The  German  system  requires  two  different  formulae  for  interest  calculation: 
72. 
the  "Rule  of  78"  for  rebates  and  the  rule  of  360  for  price  disclosure. 
In  cases 
where  it  is  necessary  to  calculate the  present  value,  it  also  uses  the  EC  method. 
The  EC  method would  enable  the  calculation  of  rebates  with  the  same formula48. 

73. 
The  main  differences  between  the  German  and  the  EC  methods  are 
related  to  the  time  period.  The  most  significant  differences  occur  in  short  term 
credit  covered  by  the  annual  percentage  rate  of  charge  disclosure  requirements 
of  the  Directive.  As  the  Directive  partially  excludes  current  account  credit  as  well 
as  credit  which  must  be  repaid  in  less  than  3  months  or  with  no  more  than  four 
instalments  and  a  life  span  of  12  months,  the  most  striking  cases  are  legally 
outside  the  scope  of  the  Directive.  However,  the  Directive  does  require  the 
indication  of an "annual  rate  of interest49" for  such  credit  as  well. 

74.  Although  this  rate  is  not  covered  by  the  requirements  of  the  mathematical 
formula  in  Directive  90/88,  many  countries  approach  both  annual  interest  rates  in 
the  same  manner.  The  problem  concerning  short  term  credit  of  less  than  one 
year  is  therefore  increasing.  For  instance,  credit  card  credit  in  particular  is  the 
first  form  of  crossborder  consumer  credit.  But  credit  card  credit,  although 
expressly  subject  to  the  annual  percentage  rate  of  charge  requirements,  tends  to 
be short term  credit  and  may thus escape these  prescriptions. 

The  differences  between  the  German  and  EC  methods  as  regards 

75. 
consumer  credit for  a period  of  more than  one year  are  less  significant. 

b) 

The  French  Method 

76. 
The  French  method  of  calculation  of the  annual  percentage  rate  of  charge 
does  not  recognize  the  importance  of  a generally  fixed  compounding  period.  The 

47 

48 

49 

There  have  been  some  developments  in  recent  years.  The  German  Bundesgerichtshof 
has  stated,  in  its  decision  of  March  12,  1991  (XI  ZR  190/90),  that  in  case  of  early 
repayment  of  a  mortgage  loan  a  bank  can  only  ask  the  ..present  value"  of  future  interest 
as  recompensation  of  lost  profit.  This  present  value  is  calculated  according  to  the  same 
rule  as  implied  in  the  EC-formula  and  generally  accepted  by  German  banks.  In  addition, 
some  banks  now  use  the  EC-formula 
for  the  rebate  in  consumer  credit  because  the  old 
"Rule  of  78" is  inapplicable  in cases where  instalments  are  not equal. 

At  present,  the  use  of  the  "Rule  of  78"  is  necessary  because  the  Rule  of  360  cannot  be 
applied  to calculate  a rebate  rationally  - no bank  applies  this  rule. 

Article  6 of  Directive  87/102 

19 

relevant  Order50  permits  the  use  of  different  periods  and  period  rates  e.g.  of  1 
month,  3  months,  half  a  year  etc,  with  interest  compounded  within  each  period. 
The  only  precision  is that  if  irregular  payments  are  made,  only  one  period  should 
be  used  for  interest  compounding.  The  period  rate  for  one  month  is  then 
transformed  into  an  annual  interest  rate  simply  by  multiplying  it by  12. 

thus  appear  artificially  more 

77. 
This  conversion  is  misleading  because  an  annual  rate  is disclosed  which  is 
in  fact  not  based  on  annual  compounding  periods  but  on  invisible,  mostly 
monthly,  compounding  periods.  As  shown  below51,  this  leads,  especially 
in 
consumer  credit  with  monthly  instalments,  to  very  significant  differences.  French 
the 
consumer  credit  contracts 
consumer  than  in  all  the  other  Member  States  of  the  European  Community  and 
the  other  members  of  the  EEA.  While  the  German  deviation  is  mathematically 
inconsistent  and  creates  artificial  difficulties  in  calculation  but  has  modest  effects 
on  ordinary  instalment  credit  (though  these  may  be  greater  if  once-off  fees  are 
important),  the  French  method  deviates  so  significantly  that  the  French  interest 
rates  are  misleading  not  only  to  other  Europeans  but  also  to  French  consumers 
who  do  not  get  a  correct  idea  of  the  differences  between  credit  prices  e.g. 
between  credits  with  monthly  or  quarterly  instalments. 

favourable 

to 

78. 
The  reasoning  behind  the  French  method  seems  to  be  that  in  their  view, 
the  function  of  the  annual  percentage  rate  of  charge  should  indicate  the  burden 
on  the  consumer,  (although  it  seems  to  be  accepted  that  the  current  EC  formula 
is  normally  used  among  businessmen)52. 
is 
erroneous,  a  misunderstanding  of  the  function  of  the  annual  percentage  rate  of 
charge.  The  annual  percentage  rate  of  charge  does  not  indicate  "the  burden  on 
the  consumer"  -  consumers  can  evaluate  the  burden  on  their  budget  only  if  it  is 
expressed  in  currency  units  because  all  their  monthly  income  and  expenditure  is 
expressed  in  such  currency  units.  In  order  to  answer  the  consumer's  question 
as  to  whether  they  should  take  a  particular  credit,  the  obligations  set  out  in  the 
Directive  regarding  the  disclosure  of  instalments  and the  total  cost,  as well  as  the 
total  amount  of  the  debt,  are  crucial.  Only  commercial  clients  may  use  the 
annual  percentage  rate  of  charge  as  an  indicator  for  the  burden  because  they 

this  is  reasoning 

However, 

50  Art.  1 of  Décret  relatif  au calcul  du taux  effectif  global,  N°  1985/944  of  04.09.85 

51 

52 

para  85  below.  See  also  §381-1  of  Gavalda  and  Stoufflet:  Droit  Bancaire  (2nd  ed)  and 
§28  of  Biardeaud:  Guide  Pratique  pour  le contrôle  des crédits  immobiliers. 

An  example  of  this  is  the  comment  made  by  the  Economic  and  Social  Committee  on  the 
EC  formula  when  initially  proposed:  OJ  n° 337 of 31.12.88  p.  1-4  §3.3.1: 

"This  formula  allows  for  the  continuous  reinvestment  of  income  as  is  normal 
among  businessmen,  in  this  case  the  crediting  of  yield  from  the  reinvestment  of 
repayments  made  by  the  borrower.  In practice,  this  is  how  the lender, but  not  the 
consumer,  assesses  the  value of  the loan. For  the consumer,  the reinvestment  of 
income  in  terms  obtainable  by  the  lender  is  deceptive.  ...  it  is  important  to  know 
the burden  of  the  borrower. " 

20 

can  compare  it  to  their  own  profit  rate  or  the  interest  rate  which  they  earn  with 
other  capital. 

The  annual  percentage  rate  of  charge  thus  answers  the  consumer's 
It  is  a  means  of  comparison.  In 
in  Directive  90/88,  which  presupposes  annual 
is  the  only  way  of 

79. 
question  as  to  which  credit  they  should  take. 
this 
the 
respect, 
compounding  also 
comparing  equally  calculated  products. 

formula 
in  the  case  of  monthly  payments, 

80. 
It  should  also  be  noted  that  financial  developments  mean  that,  for  the 
consumer,  the  date  of  payment  is  also  worth  money  because  some  credit  card 
accounts  even  allow  overpayment  and  pay  interest  on  a positive  balance. 

81. 
The  older  argument,  that  the  annual  percentage  rate  of  charge  in  France 
is  identical  with  the  usury  rate  and  that  this  rate  can  not  be  changed  because  it 
would  make  credit  usurious  which  had  not  been  usurious  before,  no  longer 
applies  due to  a change  in the  French  method  of  regulating  usury. 

c) 

Comparison  of the  EC formula  and the  German  and  French  methods 

In the  following  table,  a  fixed  instalment  loan  of  1,000  ECU  with  120  ECU 
82. 
interest  for  one  year  is  calculated.  In this  table, the  top  rows  show  clearly  that  in 
all  three  cases  the  basic  items  needed  to  calculate  an  annual  percentage  rate  of 
charge  (cost, time  and  principal)  are the same. 

83. 
In  the  German  method,  interest  is  calculated  every  month  but  only 
compounded  to  the  principal  at  the  end  of  the  year.  Three  different  calculations 
are  necessary: 

Each month 

1.  Capitaln  = Capital,.., -  Instalment; 
2.  Interest  =  Capital,*  i/12 

At  the end of the Year 

3.  Capital12  = Capital12  + z  [lnterestn ] 

In  the  French  method,  interest  is  calculated  as  in  the  German  method, 

84. 
but  compounded  monthly.  Only  one  calculation  is  necessary  each  month: 

Each month 

Capitaln  = Capital,.., -  Instalment  +  Capital,.., *  i/12) 

The  EC  formula  only  requires  one  calculation  each  month  because  it 

85. 
calculates  the  capital growth: 

Each month 

Capital, = Capital^  *(1+i)1/12 

21 

The  interest  can  be  derived  from  the  capital  column  by  simply  subtracting  the 
different  balances  after  instalments  have been deducted: 

Each  month 

Interest, = Capital,..,  Capital,  -  Instalment 

86. 
It  can  be  seen  that,  in  all  three  cases,  different  interest  rates  lead  to  the 
same  amount  of  interest  under  the  same  conditions.  While  the  German  method 
comes  quite  close  to the  EC  method, the  French  method  deviates  significantly. 

Loan  (ECU) 
Instalment  (ECU) 
Credit  Cost  (ECU) 
Life Span  (months) 
APR 

GERMANY 

1000.00 
93.33 
120.00 
12 

24.66% 

Month 
1 
2 
3 
4 
5 
6 
7 
8 
9 
10 
11 
12 

Sum 

Capital 
1000.00 
906.67 
813.33 
720.00 
626.67 
533.33 
440.00 
346.67 
253.33 
160.00 
66.67 
26.67 
0.00 
1120.00 

Interest 

20.55 
18.63 
16.71 
14.79 
12.88 
10.96 
9.04 
7.12 
5.21 
3.29 
1.37 
0.55 
120.00 

- 

FRANCE 
1000.00 
93.33 
120.00 
12 

21.46% 

Capital 
1.000,00 
924.55 
847.75 
769.57 
690.00 
609.00 
526.56 
442.64 
357.22 
270.28 
181.78 
91.69 
0.00 
1120.00 

*Ë 

C-DIRECTIV 
1000.00 
93.33 
120.00 

12 

23.70% 

Interest 

17.88 
16.53 
15.16 
13.76 
12.34 
10.89 
9.42 
7.91 
6.39 
4.83 
3.25 
1.64 
120.00 

Capital 
1000.00 
924.55 
847.75 
769.57 
690.00 
609.00 
526.56 
442.64 
357.22 
270.28 
181.78 
91.69 
0.00 

1120.00 

Interest 

17.88 
16.53 
15.16 
13.76 
12.34 
10.89 
9.42 
7.91 
6.39 
4.83 
3.25 
1.64 
120.00 

87. 
In  the  following  table,  we  have  used  different  life  spans  for  a  credit  of 
1,000  ECU,  assuming  that  the  creditor  would  take  10  ECU  interest  for  every 
month  of  the  lifespan  of  the  credit.  (This  would  be  a  rate  of  1%  using  the 
traditional  method  of  nominal  interest  calculation,  which  is  not  an  interest  rate 
but a parameter  for  easier  interest  calculation). 

LifeSpan 
(months) 

Cost  (ECU) 

6 
12 
18 
24 
48 

60 
120 
180 
240 
480 

EC  method 

French  method 

22.29 
23.70 
24.00 
23.84 
22.86 

20.29 
21.46 
21.65 
21.58 
20.75 

German  360  day 
method 
21.49 
24.66 
24.27 
24.34 
23.09 

22 

88. 
It shows  that  the  German  deviation  is quite  significant  for  periods  of  less 
than  a  year.  For  longer  periods,  the  difference  between  the  German  method 
and  the  EC  method  is  quite  small.  However,  the  difference  between  the  EC 
method  and  the  French  method  is  between  2  and  3%.  The  crossborder 
implications  of this  are  already  being felt  in certain  areas53. 

89. 
In  any  event,  there  is  no  direct  relationship  between  the  interest  rates 
which  would  enable  a  consumer  to  simply  add  2  or  3%  to  the  French  (or 
subtract  0.2%  from  the  German  method)  because  the  size  of  the  difference 
depends  on the  life  span  as well as the  up-front fees  and the  interest  rate. 

4. 

Arguments  in  favour  of  the  EC  formula 

90. 
If  the  annual  percentage  rate  of  charge  is  seen  as  a  main  factor  in 
choosing  between  different  products, the  EC formula  is  mathematically  the  only 
way  to  guarantee  that  the  price  represents  equal  conditions. All  the  regulations 
concerning  the  costs  to  be  considered  in the  annual  percentage  rate  of  charge 
calculation  are  meaningless  if  the  mathematical  procedure  of  their  inclusion  is 
not  homogeneously  defined. 

91. 
The  annual  percentage  rate  of  charge  is  the  only  form  of  a  credit  price 
that  can  help  consumers  to  shop  across  the  borders  in  the  Single  European 
Market. 
It  will  simplify  the  legal  framework  for  consumer  credit  and  make 
national  transposition  measures  more  consistent,  as well  as  providing  a  proper 
framework  for  possible  future  legislative  action  at  Community  level  as  well.  As 
the 
some  countries  also  apply 
differences  between  mortgage 
loans  and  consumer  credit  are  vanishing 
(second  mortgages  are  used  for  consumption  purposes  while  the  last  20%  of 
an uncovered  loan for  a home  is often given  in the form  of consumer  instalment 
credit),  it  would  be  important,  in  case  of  harmonisation  in  this  area,  that  there 
would  be  a  unified  system  of annual  percentage  rate of charge  calculation  from 
the  outset.  As  credit  card  credit  will  be the first  form  of consumer  credit  to  be 
offered  across  borders,  and the  use  of  credit  cards  linked  to  special  instalment 
open-ended  credit  offers 
increasingly  exponentially,  a  uniform  price 
disclosure  system  might  also  be needed  in this  context. 

to  mortgage 

loans,  and 

legislation 

this 

is 

92. 
The  potential  cost  of  adapting  banks'  computer  programs  and  price 
structures  to  handle the  EC formula  in those countries  that do  not presently  use 
the  formula  is  not  a  striking  argument. 
The  banking  sector  in  the  other 
Member  States  have  already  made  this  investment  in  order  to  adapt  to  their 
national  legislation  as  it  was  transposed. 
In  addition,  banks  in  France  and 
Germany  frequently  adjust  their  programmes  to  take  account  of  case  law  and 

53  German  banks  already  offer  consumer  credit  in  Alsace,  while  Credit  Lyonnais,  having 
purchased  a  German  bank  (BfG),  are  beginning  operations  in  Germany. 
Complaints 
have  already  been  received  from  French  consumers  who  have  been  misled  by  a 
mortgage  loan  linked  to  a  capital  life  insurance,  the  true  APR  of  which,  as  well  as  the 
dangers,  had  not  been  made clear  by the German  bank 

23 

administrative  rulings  on  the  subject  e.g.  for  the  calculation  of  rebates  in  the 
event  of  early  repayment  of  consumer  credit  and  mortgage  loans;  for  the 
calculation  of  damages  in the event  of early  repayment. 
In  addition,  some  of 
the  calculations  are  already  done  using the  mathematically  correct  form. 

93. 
Programming  will  also  be easier  using the  simpler  EC  method.  Only  the 
EC formula  offers  consumers  the  possibility  of  directly  calculating  the  increase 
of  a capital  over  a  period  of  years.  Its simplicity  (1000  ECU for  98  years  at  an 
interest  rate  of  9.6%  will  yield  to  (1  + 0.096)98  *  1000  =  7,969,559.30  ECU)  is 
striking  and  merely  requires  the  use  of  a  home  computer  or  even  a  pocket 
calculator. 

24 

IV. 

Elements  of  cost  to  be  included  in  the  calculation 

a) 

Elements  of  Cost 

The  Directive  requires  that  all credit  costs  must  be  included  in the  annual 
. The  "total  cost  of  credit  to  the 

94. 
percentage  rate  of  charge  calculation. 
consumer"  means: 

all  the  costs,  including  interest  and  other  charges,  which  the  consumer 
has  to pay  for the credit. 

The  mathematical  formula  requires  that  the  difference  between  the 
95. 
present  and future  value  of the capital  borrowed  should  include  all the  elements 
of  cost  to  be  included  in the  calculation  i.e.  not  only  the  nominal  interest  but  all 
other  charges  which  can  be  attributed  to  the  credit  as  such  and  not  to  other 
separate  services  of  special value  to the  consumer. 

96.  With  the  exception  of  insurance  fees,  the  Directive  uses  the  indirect 
method,  allowing  the  omission  of  five  types  of  costs  which  are  supposed  to  be 
"credit  costs".  Art  1a(2)  allows  the  following  charges  to  be  excluded  from  the 
calculation  of the  "total  cost  of credit  to the  consumer: 

i) 
ii) 

iii) 

iv) 

than 

the  purchase  price)  payable 

charges  payable  by the  borrower  for  default 
charges  (other 
whether  the transaction  is by cash  or  credit 
charges  for  accounts,  transfers...  (except  where  the  consumer 
does  not  have  reasonable  choice  or  such  charges  are  abnormally 
high) 
membership  subscriptions 

regardless 

b) 

Situation  in the  Member  States 

97.  As  the  number  of  items  which  could  be  considered  as  elements  of  cost 
to  be  included  in  the  calculation  is,  theoretically  speaking,  unlimited,  most 
countries  simply  repeat  the  exemptions  in  Article  1a(2),  definitely  excluding 
those  items  from  the  annual  percentage  rate  of  charge  calculation,  regardless 
Thus  the  regulations  in 
of  how  closely  they  are  related  to  the  credit. 
Denmark,  Greece,  Ireland,  Italy,  Luxembourg,  Portugal  and  Norway  follow 
closely  the  wording  of  Article  1a(2)  of  the  Directive,  with  practical  application 
generally  left  to  case  law. 

25 

Art 
1a2 

B 

DK 

D 

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ES 

F 

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IT 

L 

NL 

0 

PT 

SF 

SV 

UK 

IS 

LI 

N 

i 

ii 

iii 

iv 

V 

Comments 

/ 

/ 

/ 

/ 

/ 

• 

/ 

/ 

/ 

/ 

/ 

/ 

/ 

/ 

/ 

/ 

/ 

/ 

— 

/ 

— 

— 

S 

/ 

/ 

/ 

/ 

/ 

/ 

/ 

/ 

/ 

/ 

/ 

/ 

/ 

/ 

* 

/ 

/ 

/ 

/ 

/ 

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/ 

/ 

/ 

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/ 

* 

/ 

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* 

— 

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— 

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* 

* 

/ 

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* 

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* 

* 

* 

/ 

/ 

Open  list  of  charges  to  be  included.  For  insurance,  the  criteria  is 
whether  a reasonable  choice  is  given 

Insurance which does not secure repayment is exempt, whether 
mandatory or not 

All  charges  are  included  in the  rate,  including  mandatory  insurance 
charges  (but  non-mandatory  ones  are  not  listed  as  exempted) 

All  charges  are  included  in  the  rate.  Jurisprudence  has  resulted  in 
some  changes. 

If the  range  of  services  provided  is wider  than  credit,  membership 
fees  are  not  included.  If  credit  is the  main  activity,  the  fee  is 
included 

If  account  fees.,  or  insurance  fees  are  obligatory,  they  must  be 
included.  There  are  no  membership  fees. 

All  charges  except  those  for  non-mandatory  insurance  are  included 

The  Act  exempts  no costs  (including  insurance). 

All  mandatory  costs  are  included. 

All  costs,  including  non-mandatory  insurance,  are  included 

/ 

* 

= 

= 

= 

Corresponds  to  Directive  90/88  i.e.  these  charges  are  specifically  excluded 
from the calculation  of the Global  Annual  Effective  Rate 
Goes  further  than  the  Directive  - there  is  no  specific  exemption  for  these  items 
-  but they  may  in  practice  be excluded 
See  individual  comments  and  relevant  paragraphs  below 

98. 
the  Directive54. 

In  Denmark,  the  costs  to  be  included  are  more  comprehensive  than  in 
In  Belgium  there  is  a  positive  list  of  those  elements  of  cost  to 

54  Article  13 of  the  1990 Credit  Agreement  Act  defines  the  total  price  of  credit  as the  sum of 
all  charges  with  the  exception  of  certain  charges  (corresponding  to  those  in  the  Directive, 
but  more  restricted).  Charges  are  divided  into  three  types:  those  to  be  included  in  the 

26 

be  included  in  the  calculation  which  must  be  included55  as  well  as  a  list  similar 
to  the  exemptions  in  the  Directive  (although  provided  the  consumer  has  a 
reasonable  choice,  neither  the  costs  of  a  credit  card  which  are  not  connected 
Italy  and  Luxembourg  also  have 
with  credit  nor  insurance  costs  are  included). 
an  open  list  of  charges  to  be  included  in  the  calculation,  though  the  list  of 
exemptions  is  closed.  Member  States,  in practice,  arrive  at  lists  similar  to  that 
of  Belgium  through  their  reference  to  the  term  "credit  cost"  which  includes 
items  like  brokerage  fees,  up-front  fees,  disagios...  which  must  be  included  in 
the  annual  percentage  rate of charge calculation. 

The  situation  in  other  Member  States  differs  slightly  -  Spain,  France, 
99. 
Finland,  Sweden  and the  UK are  tacit  on the subject  of the  list  in Article  1a(2). 
This  does  not  necessarily  mean  that  they  deviate  from  the  practical  method  of 
annual  percentage  rate  of  charge  calculation,  because  they  assume  that  the 
general  definition  of  the  elements  of  cost  to  be  included  in  the  calculation 
already  leads,  in  principle,  to  the  exclusion  of  certain  of  the  items  concerned 
(fees  for  late  payments,  fees  for  bank  accounts,  membership  fees  and  special 
cash  price  fees).  These  States  do,  however,  make  an  important  distinction  in 
that  they  generally  exclude  only  those  elements  of  cost  to  be  included  in  the 
calculation  which  are  not  mandatory  -  while  the  majority  of  States  exclude  the 
items  listed  in  Article  1a2,  these  States  apply  a  test  of  how  the  fees  have 
entered  into  the  contract.  They  therefore  apply  the  distinction  in Article  1a2(v) 
concerning  insurance fees to  all other  charges. 

100.  The  Spanish  legislation  requires  all  charges  to  be  included  in  the 
calculation,  including  mandatory  insurance  charges.  Non-mandatory  insurance 
is  not  mentioned  as  specifically  exempt  from  inclusion.  The  elements  of  cost 
to  be  included  in  or  excluded  from  the  calculation  are  not  listed,  except  as 
regards  insurance  premiums  and  default fees56. 

101. 
In  France,  Article  L.  313.1  of  the  Consumer  Code  states  that  the 
calculation  must  reflect  all  interest  and  other  charges,  commissions  and 
remunerations  of  any  kind,  direct  or  indirect...  e.g.  including  payments  to 
intermediaries.  The  Comité  Consultatif  of  the  Comité  Usagers  of  the  Conseil 

annual  percentage  rate  of  charge  but  not  necessarily  mentioned  individually  (e.g.  charges 
by  the  creditor  or  third  parties);  those  to  be  listed  but  not  included  in  the  annual 
percentage  rate  of charge  (membership  fees...)  and those  to  be  neither  listed  nor  included 
(cheque  fees, transaction  fees  unless  the  method is  compulsory...) 

55  Article  2.1  of  the  Arrête  Royal  1381  of  4.8.1992  contains  an  open  list  of  charges  which 
should  be  included  in  the  "taux  annuel  effectif  global". 
These  include  charges  for: 
inquiries,  advertising,  the  creation  of  a  file,  inquiries  at  a  credit  register,  administration  of 
the  file,  accounting  and  collection,  intermediaries,  credit  insurance,  guarantees  and  other 
personal  securities,  and anything  else the creditor  requires  for  the  credit... 

56  Article  6.2c  of  the  1995  Consumer  Credit Act  states  that  debt  insurance,  if  required  by  the 
It  also  exempts  from  the  calculation  charges 

lender,  must  be  indicated  in  the  total  cost. 
in  the  event  of  default 

27 

N a t i o n a l - du  Crédit, 
in  a  Report,  produced  a  detailed 
t h o u gh  the  list  d o es  not  appear  to  be  binding  in  nature: 

list  of  such  charges5 7, 

Charge  included 
establishment  and administrative  costs 
costs  for securities  and warranties 
guaranteeing  a bill  of  exchange 
notary  costs 
stamp  duty 
compulsory  death  insurance  premiums 
overdraft  charges 
fee for  keeping  money  available 
fee  for  confirmation 
account  statement  fees59 
fees  for  endorsements 

Charge  not  included 

book-keeping  fees 
fees for  not  using  a credit granted58 

service  charges 
postage 
non-compulsory  death  insurance  premiums 

Case  law  and  administrative  precedent  have  included  certain  elements  in  the 
calculation  e.g.  account  fees  and  insurance  premiums.  Companies  in  France  are 
prohibited  from  selling  both  credit  and  insurance,  and  mandatory  insurance  is  not 
required  for  consumer  credit  but  rather  for  mortgages. 

102.  Credit  costs  in  Finland  are  defined  as  "the  total  amount  of  interest,  costs 
and  other  payments  that  the  consumer  shall  pay  on  the  basis  of  the  consumer 
credit  relationship.  No  list  of  items  to  be  included  or  excluded  is  provided.  Since 
1993,  insurance  premiums  are excluded  and  must  be  listed  separately. 

103.  Credit  costs  in  Sweden  are  defined  as  the  total  sum  of  all  cost  elements 
(interest,  additional  costs  and  other  charges).  In theory,  there  are  no exemptions  -
all  elements  of  cost  to  be  included  in  the  calculation  must  be  included  in  the 
In  practice,  the  exemptions  in the  Directive  are 
annual  percentage  rate  of  charge. 
used. 
If  credit 
Insurance  charges,  however,  are  not  mentioned  in the  regulations. 
is  combined  with  insurance,  or  if  a  separate  insurance  is  mandatory,  these  costs 
Charges  to  third  parties,  which  arise  in  connection  with 
must  be  included. 
mortgages  (which  are within the scope  of the Act)  are  not mentioned. 

104.  The  UK  also  defines  the  total  charge  as  the  interest  and  other  charges  at 
The  exemptions60  are  much  more 
any  time  payable  under  the  transaction. 

57 

58 

59 

60 

Report  on  the  Reform  of  Usury  Legislation,  December  1992.  The  list  is  described  as 
'being  given  "under  the  reservation  of the  sovereign  appreciation  by  the courts" 

Listed  under  different  names  as  a  cost  to  be  included  (commission  d'immobilisation, 
commission  d'engagement  sur  autorisation,  commission  de  confirmation)  and  under  two 
names  as  a cost  to be excluded  (commission  de  nonutilisation,  commission  d'attente). 

Though  there  also  appears  to  be an obligation  to  provide  these  free  of  charge 

Defined  in  Article  5  of  the  Statutory  Instrument  The  Consumer  Credit  (Total  Charge  for 
Credit)  Regulations  1985 

28 

than  in  the  Directive  -  there  is  differentiation  between  different  forms  and 
detailed 
All  premiums  for  life  insurance  are  exempted61. 
purposes  of  credit. 
Initial  fees 
(e.g.  for  administration  costs)  are  common  in  UK  consumer  credit,  and  may  be 
Rest  debt  insurance  (against 
either  added  to  the  balance  or  paid  up  front. 
accident,  sickness  or  unemployment) 
the 
instalments  during  that  period  of  illness  or  unemployment  and  may  be  of  limited 
duration.  Life  insurance  cover  is  often  required  for  larger  loans. 

is  common  but  usually  only  covers 

105.  As  regards  the  remaining  Member  States,  an  initial  administration  fee  is 
usually  required  for  consumer  credit  in  Germany,  but  some  banks  claim  to  use  no 
other  ancillary  charges  (periodic  fees,  statement  fees...).  Germany  uses  the  same 
exemptions  as  in  the  Directive.  Rest  debt  insurance  is  offered,  but  is  usually  not 
mandatory  for  consumer  credit.  Where  it  does  apply,  it  is  usually  paid  as  a 
lumpsum  in  advance,  and  the  costs  must  be  listed  separately.  Insurance  which 
does  not  secure  repayment  is  excluded  from  the  calculation,  whether  mandatory  or 
not. 

106.  The  Austrian  regulation  defines  the  cost  elements  to  be  excluded  from  the 
calculation; 
These  exceptions  differ  from  those  in  the  Directive  in  that  Austria 
does  not  mention  charges  other  than  the  purchase  price  which  must  be  paid 
regardless  whether  the  transaction  is  by  cash  or  credit,  or  membership  fees. 
These  does  not  necessarily  mean  that  these  are  to  be  considered  as  interest,  as 
they  could  be  considered  as  part  of  the  purchase  price.  Nor  do  charges  required 
by  the  State  have  to  be  included.  Customers  must  also  pay  for  their  annual  bank 
statements. 

107. 
In  the  Netherlands,  only  direct  credit  charges  (including  mandatory  rest  debt 
insurance),  fees  in  case  of  default  and  compensation  in  the  event  of  premature 
repayment  are  permitted  to  be  included  in  the  calculation62.  No  other  charges  are 
permitted 
If 
for  consumer  credit,  either  as  initial  charges  or  periodic 
services  connected  with  the  credit  (e.g.  death,  unemployment,  invalidity  and  other 
insurance)  are  offered,  the  charges  must  be  included  in  the  annual  percentage 
rate  of  charge,  may  not  be  counted  as  separate  payments,  and  must  not  surpass 
in  the  order  on  Credit  Remuneration63.  Rest  debt 
the  maximum  rates 
insurance 
is  not 
allowed. 

insurance  with  consumer  credit 

is  common,  but  compulsory 

listed 

fees. 

108. 
In  Iceland,  the  total  cost  of  credit  includes  all  interest  and  other  charges  to 
be  paid  by  the  consumer,  with  the  exemptions  listed  in  the  Directive.  Charges  for 
the  transfer  of  funds  and  for  keeping  an  account  (except  collection  charges)  are 

61  Statutory 

Instrument:  The  Consumer  Credit  (Total  Charge  for  Credit)  (Amendment) 

Regulations  1985 

62  Article  34  of  the  Consumer  Credit  Act  prohibits  all  "rewards  for  the  lender"  other  than 

these  charges. 

63  Besluit  Kredietvergoeding,  Stb.  1991/549  of  16.10.91 

29 

exempted  only  when  the  consumer  has  reasonable  freedom  of  choice  in  the  way 
funds  are  transferred  or  collected  and  the  charges  are  not  abnormally  high.  The 
inclusion  of  insurance  costs  is not  restricted  to compulsory  insurance. 

109.  Unlike  the  exemptions  listed  in  Article  1a(2)(i)-(iv),  Article  1a(2)(v)  of  the 
Directive  indicates  the  only  positive  item  to  be  included  in the  calculation  of  annual 
percentage  rate  of  charge. 
It  exempts  charges  for  insurance  or  guarantees  from 
inclusion  in  the  calculation,  except  death,  invalidity,  illness  or  unemployment 
insurance  which  are  to  be  included  in  the  calculation,  as  are  other  charges  which 
have  to  be  imposed  by  the  creditor  "as  a  condition  for  credit  being  granted".  All 
countries  have,  in  one  way  or  another,  referred  to  this  in  their  legislation. 
Interpretations  differ,  however.  Some  countries  assume  that  such  insurance 
premiums  are  always  mandatory  and therefore  regularly  included, while  others  e.g. 
Germany  repeat  the  text  of  the  Directive  literally  but  in  practice  assume  that  credit 
life  insurance  is  never  mandatory.  This  is  because  of  their  legal  definition  of  the 
concept  of  "condition" whereby  insurance  is  interpreted  as  being  "imposed  by  the 
creditor  as  a  condition  for  the  credit  being  granted"  only  if  the  credit  contract  is 
legally  linked  to  the  insurance  contract  whereas  in  practice  creditors  offer  two 
separate  contracts  which  are  only  linked  by  the  fact  that  the  bank  will  only  grant 
the  credit  if  the  insurance  is  also  taken. 
In  this  respect,  Belgian  legislation  takes 
the  other  view,  asking  whether  a  rational  choice  between  a  credit  contract,  with  or 
In  practice,  this  usually 
without  such  an  insurance  coverage,  has  been  offered. 
lead  to  the  inclusion  of  such  premiums64.  The  UK  appears  to  be  the  only  country 
which  expressly  excludes  life  insurance  premiums  from  the  annual  percentage  rate 
of  charge  calculation  even  though  such  insurance  is  obligatory  for  credit  contracts. 

110.  These  differing  interpretations  of  Art  1a(2)(v)  can  lead  to  differences  in 
annual  percentage  rate  of  charge  calculations  for  identical  products  in  different 
Unlike  the  charges  excluded  by  Article  1a(2)(i)  to  (iv),  insurance 
countries. 
premiums  are  an  important  element  of  the  burden  of  charges  on  a  consumer  (up 
to  a  quarter  of  the  credit  costs  in  some  cases). 
It  may  be  necessary  to  exclude 
distinctions  which  are  easy  to  circumvent  through  simple  formulations  and  the  use 
of  different  formulae  by  creditors  -  while  this  would  not  eliminate  situations  where 
creditors  refuse  to  grant  credit  without  also  selling  insurance  coverage,  it  would 
open  the  door  to  more  competition  for  insurance  premiums. 
This  is  necessary 
because  the  same  life  insurance  purchased  separately  from  a  consumer  credit 
Separate  life  insurance  would  also  have  the 
contract  is  usually  lower  in  price. 
advantage  that  it  could  be  used  for  subsequent  credit  contracts  and  other 
purposes  without  fees  for  age  progression.  Creditors  should  be  persuaded  to 
insurance  coverage  instead  of 
disclose  to  consumers  the  possibility  of  separate 
overcharging  for  linked  credit  life  insurance  contracts. 

64  Empirical  surveys 

in  Germany  have 

finance 
revealed 
companies  offering  credit  for  low  income  consumers  insure  up  to  98%  of  the  credit 
contracts  while  savings  banks  showed  a  rate  of  less  than  5%.  Credit  life  insurance  is 
therefore  mostly  an  additional  security 
income 
consumers  and  offers  the  bank  additional  "interest"  because  insurance  companies  pay  up 
to  3.5%  as  a brokerage  fee to the  bank 

instalment  banks  and 

required  by 

the  creditor 

from 

that 

low 

30 

111.  At  the  meeting  with  governmental  experts  in  April  1995  to  discuss  this 
subject65,  the  experts  reported  on  the  situation  in  their  Member  States  with  regard 
to  the  elements  of  cost  to  be  included  in  the  calculation  included  in  their  national 
legislation.  Some  experts  explained  the  reasons  why  their  Member  States  had 
gone  further  than  the  Directive,  or  that  the  intent  of  their  legislation  was  the  same 
even  if  the  wording  used  differed,  and  some  clarifications  of  certain  aspects  were 
given.  Following 
the  study  by  Professor 
Seckelmann,  it  was  felt  that  Member  States  include  almost  the  same  elements  in 
their  calculations  and  that  any  differences  that  do  exist  are  minimal  in  nature.  The 
Commission  does  not  therefore  propose,  at  this  stage,  to  amend  the  list  of 
elements  of  cost  to  be  included  in  or  excluded  from  the  calculation  of  annual 
percentage  rate  of charge. 

this  meeting  and 

the  results  of 

65  Paragraph  6 supra 

31 

V. 

Other  issues 

112.  While  the  Directive  requires  an evaluation  and  a  report  which  "...will  make  it 
possible,  in  the  light  of  experience,  to  apply  a  single  Community  mathematical 
formula..."66,  this  requires  an  examination  of  other  issues  than  the  mathematical 
formula  alone,  in order to  define  a uniform  application  of the  formula67. 

1. 

The  Denomination  of the  annual  percentage  rate  of  charge 

113.  The  Directive  does  not  regulate  the  multitude  of  interest  rates  or  parameters 
with  which,  according  to  the  principle  of  freedom  of  contract,  lenders  define  how 
they  calculate  the  credit  costs  internally.  The  only  legally  defined  parameter  for 
credit  cost  is  the  annual  percentage  rate  of  charge,  presupposing  either  a  special 
form  of disclosure68  or a  homogeneous  denomination. 

114.  The  table  below  indicates  that  there  are  almost  as  many  denominations  as 
there  are  Member  States. 

66 

67 

Article  1a(5)(b)  of  Directive  87/102 

While  Article  14  of  the  Directive  specifically  mentions  the  "distribution  of  the  amount  of 
credit  over  several  agreements",  other  circumventions  occur.  On  several  occasions,  the 
German  Bundesgerichtshof  has  ruled  that  the  combination  of  capital  life  insurance  and 
consumer  credit  can  be transformed  into  one  single  credit  with  one  single  APR  in  order  to 
find  out  whether  it  is  usurious.  Another  circumvention  is  the  combination  of  savings  and 
credit  where  the  consumer  is  required  to  save an  amount  equal  to  the  sum  of  the  credit  in 
a  special  account  (e.g.  a  whole  life  insurance  account  or  even  an  instalment  savings 
account).  The  credit  is  not  reduced  and only  at  the  end  are  the  savings  used  to  repay  the 
credit  in  one  single  instalment. 
Interest  is  due  on  the  total  amount  of  credit  from  the 
beginning  to the  end  of the  life  span.  The savings  have earned  much  less  interest  than  is 
to  be  paid  on  the  credit,  but  the  consumer  has  had  to  use  the  money  for  low-interest 
savings  instead  of  repaying  the  high-interest  credit. 
Such  combinations  can  also  be 
easily  transformed  into  one  credit  relationship,  with  the  EC  formula  applied  to  the  total  of 
In such  cases,  the  true  APR  is  normally 
all  payments  either  on the  credit  or  the  savings. 
at  least  1% higher  than  the  disclosed  APR.  The  problem  posed  by  such  combinations 
should  be studied. 

68 

US  legislation  prescribes  a  special  form  sheet  wherein  the  APR  has  to  be  disclosed  in  a 
defined  area 

32 

Short form 

Denomination 

B 

DK 

D 

EL 

Taux  d'intérêt 
effective/  Effektieve 
Rentevoet 
E.  Rentefod 

E. Zinssatz  and,  less 
often,  E. Zinsfuss 

7T.€7rt  TOK  L  O,  P. 
Epitokio 

ES 

Tipo  de  interés  E. 

IR 

IT 

Taux  d'intérêt  E. 
E.  Interest  Rate 

Tasso  D'intéressé  E. 

Taux  D'intérêt  E. 

NL 

E.  Rentevoet 

O 

E. Zinssatz 

Taxa  de Juro  E. 

SF 

SV 
UK 

Todellinen  vuosikorko 
/  effectiv  rànta 
Eff.  ranta 
E.  Interest  Rate 

ISL 

none 

LI 
N 

E.  Rente 

taux  annuel effectif 
global/ jaarlijkse 
kostenpercentage 
arlige omkostninger  i 
procent 
effektiver  Jahreszins  or 
anfânglicher  effektiver 
Jahreszins 

r  i  KO 

TT pay[lot 
errjoLo 
CTTLTOKLO (EnE),  etisio 
pragmatiko  epitokio, 
(EPE) 

tasa  anual équivalente + 
porcentaje  anual de 
cargas  financieras 

taux  effectif  global 

annual  percentage  rate 
of  charge, (APR) 
tasso  annuo  effettivo 
globale,  (TAEG) 
taux  annuel  effectif 
global 
effektief 
kredietvergoedingsperce 
ntage  (op jaarbasis) 

(dekursiver)  effektiver 
and fiktiver  Jahres-
zinssatz 
taxa  anual de  encargos 
efectiva  global, (TAEG) 
todellinen  vuosikorko  / 
effectiv  rànta 
effektiv  rânta 
annual  percentage  rate, 
(APR) 
ârleg  hlutfallstala 
kostnaôar 
Effektive  Jahreszins 
effektiv  rente 

English Translation 

global  effective  annual 
rate/  annual  cost 
percentage 

annual  costs  in  percent 

effective  annual  interest 
or initial  effective 
annual  interest 
annual  effective  interest 
rate 

annual  equivalent  rate + 
annual  percentage  of 
financial  burden  (tipo 
de  interés  E.) 
global  effective  rate 
also  annual  percentage 
rate 
global  effective  annual 
rate 
global  effective  annual 
rate 
effective  credit 
remuneration  per 
centage  (on  the  basis 
„year") 

(decursive)  effective 
and fictitious  annual 
interest  rate 
global  effective  annual 
rate of  burden 
effective  annual  interest 

effective  interest 
also  annual  percentage 
rate of charges,  (APRC) 
annual  percentage  rate 
of  costs 
effective  annual  interest 
effective  interest 

33 

115.  The  common  elements  are 

"Rate" 
The  majority  of  Member  States  of  the  European  Community  and  the  other 
members  of the  EEA  use the term "rate"69 
"Annual" 
Except  for  France,  Sweden  and  Norway70,  other  Member  States  use  the 
term  "annual".  This  is  particularly  important  as  France,  for  instance,  still 
uses  monthly  or quarterly  rates. 
"Effective" 
With  the  exception  of  Denmark,  Spain,  Ireland,  the  United  Kingdom  and 
This 
this 
Iceland, 
distinguishes  between  other  interest  rates  used  by  lenders. 

the  majority  of  the  Member  States  use 

term. 

116.  As  regards  other  terms  found  in  some  Member  States,  not  all  Member 
States  include  the  concept  of "interest"  or  "charge"  in their  term.  Of those  that  do, 
Member  States  are  fairly  equally  divided  between  those  which  refer  to  the  result  of 
the  calculation  (the  interest  rate)71  and  those  who  prefer  to  refer  to  what  it 
represents  (the  rate  of  charge)72. 
The  inclusion  of  either  term  does  not  add 
significantly  to  the  transparency  of the term. 

117.  While  some  Member  States  do  use  the  term  "Percentage"73,  it  is  so 
common  as  to  be  understood  and  the  inclusion  of  the  word  does  not  add 
It should  be  noted,  in  any  event,  that  the  use  of  the 
significantly  to  transparency. 
term  "percentage  rate"  is  no  substitute  to  providing  accurate 
information  to 
consumers. 

118.  Those  elements  which  are  most  important  for  the  transparency  of  the  term 
are  therefore  those  found  in the  Belgian,  Greek,  Italian,  Luxembourg,  Austrian  and 
Portuguese  terms  i.e.  "Rate", "Annual" and  "Effective"74. 

69 

70 

71 

72 

73 

74 

With  the  exception  of  Denmark,  Germany,  Netherlands,  Finland,  Sweden  and  Norway. 
However,  it  should  be  noted  that  Germany  uses  both  the  term  "interest"  and  "interest 
rate"  and  the  exclusion  of  the  word  "rate"  seems  to  be  language-specific.  The  Directive 
itself  uses  both  terms  and  therefore  those  States  which  transcribed  the  Directive  exactly 
should  be considered  as  using  the term "rate". 

In  Norway,  the term  is,  by  its  legal  definition,  an annual  interest 

Denmark,  Greece,  Austria,  Finland,  Sweden,  Norway 

Belgium,  Spain,  Ireland,  Portugal,  United  Kingdom,  Iceland 

Belgium,  Denmark,  Spain,  Ireland,  Netherlands,  United  Kingdom,  Iceland 

The  original  1979  Commission  proposal  used  the  terms  "Effective  Annual  Rate  of 
Interest",  "Taux  Annuel  Effectif  Global"  and  "Effektiver  Jahreszins". 
While  different 
terms,  proposed  by  the  European  Parliament,  were  accepted  in  the  1983  Amended 
Proposal:  "Annual  Percentage  Rate  of  Charge",  "Taux  annuel  des  frais"  and  "Jâhrlicher 
Belastungssatz",  these  later  reverted  to  the  original  terms.  By  the  time  discussions 
reached  the  Council  Working  Group, 
the  original  French  and  German  terms  were  again 
used,  as  also  in  the  final  version  of  the  Directive.  The  term  in  the  English  language 

34 

"global". 

119.  An  additional  feature, found  in the  French  language  version  of  the  Directive, 
and  presently  used  by  Belgium,  France,  Italy,  Luxembourg,  and  Portugal  is  the 
word 
transparency  and 
comprehension  of  the  term  for  the  average  consumer  as  it  indicates  that  the 
totality  of  the  costs  to  be  paid  are  contained  in  the  annual  percentage  rate  of 
charge 

This  word  adds  considerably 

the 

to 

literal  meaning,  has  led  to  problems 

120.  The  fact  that  the  wording  used  to  translate  the  original  term  (taux  annuel 
effectif  global)  differs  from  one  Member  State  to  another  and  is  often  different  in 
its 
in  practice  because  some  of  the 
denominations  used  in  one  country  to  denominate  a  certain  "rate"  are  sometimes 
It  would  therefore 
used  in  other  countries  to  denominate  other,  different  "rates". 
be  useful  if  some  homogeneity  and  transparency  could  be  achieved  in  order  to 
assist  in  consumer  comprehension.  However,  bearing  in  mind  that  much  effort 
has  been  expended  in  communicating  to  consumers  the  meaning  of  the  terms 
presently  used  in  each  Member  State,  it  does  not  seem  appropriate  to  propose  a 
change  in  the  wording  used  in  the  different  languages.  Nevertheless,  it  is 
desirable  that  a  common  feature  be  included  in  order  to  enable  consumers, 
particularly  in  crossborder  situations,  to  recognise  these  terms  as  being  equivalent 
to  those 
Following  discussions  with 
governmental  experts  it was felt  that,  rather  than  proposing  that  the  different  terms 
used  in  the  different  national  legislation  for  "annual  percentage  rate  of  charge"  be 
harmonised,  and 
the  principles  of  proportionality  and 
subsidiarity,  a  common  feature  should  be  included  in  order  to  enable  consumers 
to  recognise  these  terms  as  being  equivalent  to  the  one  in  use  in  their  own 
in 
Member  State. 
accordance  with  the  principles  of  proportionality  and  subsidiarity,  it  is  proposed 
that  the  use  of  a  symbol  in  addition  to  the  existing  term  will  be  required.  This 
symbol  will  be  identical  in  each  Member  State.  This  will  not  constitute  a  change 
in  the  language  of  the  term  and  will  only  involve  a  small  additional  cost  for 
transposition. 

Following  discussions  with  government  experts,  and 

in  their  own  Member  States. 

in  accordance  with 

in  use 

2. 

Accuracy 

121.  The  Directive  does  not  define  the  degree  of  accuracy  required  in  the 
calculation  of  annual  percentage  rate  of  charge.  The  examples  given  in  Annex  III 
presuppose  that  Member  States  may  prescribe  an  accuracy  of  one  or  two  decimal 
places.  It  thus  seems  clear  that  the  Directive  demands  at  least  accuracy  to  one 
decimal  place. 

122.  Most  countries  in  fact  demand  accuracy  to  one  decimal  place. 
This, 
however,  can  make  consumer  credit  contracts  for  ECU  20,000  over  60  months 
look  equivalent  although  they  may  actually  differ  in  cost  by  about  ECU  50  (5  * 
0,0999  *  20,000/2  = 49.99).  As  the  scope  of  consumer  credit  legislation  in  many 
Member  States  covers  much  higher  amounts  and  longer  terms, the  difference  may 
In those  Member  States  which  include  mortgage  credit  in  the 
be  up to  ECU  500. 

version  alternated  between  "effective  annual  rate  of  interest"  and  "annual  percentage  rate 
of  charge"  up until  the final  draft  of the  Directive. 

35 

scope  of  the  Directive,  the  difference  may  amount  to  several  thousand  ECU. 
Such  a  discrepancy  is  not  tolerable. 

123.  More  accuracy  should  therefore  be  required  for  higher  amounts  of  credit.  At 
least  two  decimal  places  should  be  prescribed  (though  with  the  possibility  of 
allowing  one  decimal  place  if  one  decimal  represents  costs  of  less  than  ECU  50). 

3. 

Time  definitions 

124.  Different  definitions  of  time  are  in  use  in  the  Member  States.  The  Directive 
that  all  calculations  should  be  made  with  daily  correctness 
implicitly  states 
((Remark  b)  of  Annex  II). 
It  also  states  that  intervals  "shall  be  expressed  in  years 
or  in  fractions  of  a  year"75.  This  assumes  that  a  day,  week  or  month  can  be 
expressed  in  a  constant  fraction  of  a  year. 

APR  rules 

Comments 

Practice  of 
n o m i n al 
Interest 
3 6 5 / 5 2 / 12 
365 /  360 

B 
DK 

— 
365.25 

D 

3 6 0/  12 

360 

EL 

3 6 5 / 5 2/  12 

*~ 

ES 

3 6 5/  12 

365 

F 

365/  12 

•<~~ 

IR 
IT 
L 
NL 
O 

P 
SF 
SV 
UK 
ISL 
LI 
N 

3 6 5 / 5 2/  12 

366 /  365 
3 6 5/  12 
365/360/12 

«-
«-
366/365 
<-
360 

360/12 
360/  12 
3 6 5 / 5 2/  12 

360 
360/  12 

«-

— 
<-
«-
«-

— 

12 months  of different  lengths 
Valuation  is  calculated  for  one  day  and  converted 
to  365.25  days  (4 year  average) 
12  months  of  30  days.  365  day  year  for  certain 
transactions 
12  months  of  equal  lengths.  360  day  years  for 
loans,  365 for  savings 
Valuation 
converted  to  365  days 
Valuation  is  calculated  for  a  period  and  converted 
to 365 days.  12 months  of equal days. 
12 months  of  equal  lengths 

for  one  month  and 

is  calculated 

Each year  equals  the  calendar  year 
Actual  months  (28, 30, 31  days) 
12  months  of  30  days.  360  days  for  savings  and 
consumer  loans, 365 for  commercial  loans 

Each year  equals  the  calendar  year 
12 months  of  30  days 
12 months  of equal  length 

12 months  of  30 days 

same  as for  nominal  interest  calculation 

75  Remark c of Annex II 

36 

125.  As  can  be  seen  from  the  above  table,  which  indicates  practice  in  different 
Member  States,  most  countries 
for  Germany,  Austria,  Sweden, 
(except 
Liechtenstein  and  Norway)  have  already  introduced  the  correct  calendar  into  their 
calculations.  For  default  interest,  German  banks  also  use  the  365  day  year.  For 
annual  percentage  rate  of  charge  calculation,  Denmark,  Luxembourg  and  Spain 
prescribe  365  day  years  while  Germany,  Austria  and  Liechtenstein  prescribe  360 
day  years.  All  other  countries  assume  that  the  same  year  will  be  used  as  is  used 
in  nominal  interest  calculation. 

in  the  results  achieved 

126.  The  differences 
these  variations  are 
significant.  For  instance,  a  nominal  interest  rate  of  18%  p.a.  for  an  open-ended 
credit  used for  one  day  gives  an  annual  percentage  rate of  charge  of  19.422% p.a. 
if  calculated  at  360  days  a  year,  and  gives  19.716%  p.a.  if  calculated  at  365  days 
a  year76. 

through 

127.  There  is  no  reason  why  calendar  days  should  not  be  prescribed  as  the 
basis  of  a  calculation  while  a year  could  generally  be  assumed  to  have  365  or  366 
days  (or  365.25  days  to  take  account  of  leap  years,  though  the  difference  caused 
by the  loss  of  one day  every 4  years would  not  be  significant  enough  to  be  noticed 
even  with  accuracy  to  two  decimal  places).  Nor  is there  any  need  to  compensate 
for  a credit taken  out  in a shorter  month. 

128.  Annex  II  should  therefore  be  amended  to  state  that  a  year  is  presumed  to 
have  365  or  366 days. 

76  The  easiest  way  to  do  such  calculations  using  computers  is  by  using  the  calendar  day 
because  each  computer  has  an  inbuilt  calendar.  Calendar  dates  can  be  easily  subtracted 
and  the  number  of  days  defined. 
However,  computers  have  extreme  problems  of 
definition  when  using  the  360  day  formula  -  a  test  of  the  relevant  function  in  a  popular 
spreadsheet  program  showed  that  their  offer  of  a  360-day  function  is  not  correct  because 
the  sum  of  the  days  of  10  years  differs  by  more  than  10  days  if  calculated  in  one  or  in 
several  intervals.  A correct  360-day  calculation  is therefore  impossible 

37 

VI. 

Conclusions  and  Recommendations 

129.  There  is  a  list  in  Annex  2  of  the  national  legislation  which  transposed  the 
Directive  in  the  Member  States  of  the  European  Community  and  the  other 
members  of the  EEA. 

130.  As  regards  the  verbal  definition  of  the  annual  percentage  rate  of  charge, 
some  amendments  are  required  to  the  English  and  Greek  language  versions  of 
the  Directive. 
The proposed  wording  for  the  English  version  of Article  1a(1)(a)  is 
as follows: 

The  annual  percentage  rate  of  charge,  which  shall  be  that  rate,  on  an 
annual  basis,  which  equalises  the present  value  of  all  commitments  '(loans, 
repayments  and charges),  future  or  existing,  agreed  by  the  creditor  and  the 
borrower,  shall  be  calculated  in  accordance  with  the  mathematical  formula 
set out in Annex II. 

and the  proposed  wording  for  the  Greek  version  of Article  1a(1)(a)  is as follows: 

irporyiioiTLKO  TTOOOUTO  eiufiôtpvvorjç 

-notpovoeç 

oi£îeç 

TOV  avvôXov 

TTOV  ettoûveL 
TWV  Tp£xov&ûv 

viïoxpeûoeuv 
0ivaXr]4>6e  i  airô  TO  ôave 

(àaveîwv, 

eÇocpXficeuv 

IOTT)  non  TO  (ÔŒVe 

KOLTOLVOIXUITT), 
L  nô  TVTTO  TTOV  -notpoLTiB  eTOii  OTO 

KOLL  eirifiotpvvoeuv) 
iÇô^ievo) 

ÇeTùtL  oviiQuvot 

u.e  TO  uadrj^oiT 

oe 
T) 
TIOV 

erijoLO 
T IÇ 

(Sacq 

"To  OVVOXLKO 
ETfjoLOi 
LieWovTLKÛV 
éxovv 
viroXoyt 
TTOipÔipTTJIKX  I I ". 

131. 
It is proposed  to  require  the  use  of a symbol  in addition  to the  term  currently 
in  use  in  each  Member  State  for  the  "annual  percentage  rate  of  charge".  This 
symbol will  be  identical  in each  Member  State. 

132.  As  far  as  the  mathematical  formula  is  concerned77,  it  is  proposed,  based 
on  the  arguments  contained  in  this  Report,  that  the  formula  in  Directive  90/88 
should  be  retained  and  made  general  throughout  the  European  Community  and 
the  other  members  of the  EEA. Article  1a(5)  should  therefore  be  removed  from  the 
Directive  as  it will  no longer  be  necessary. 

133.  For  the  calculation,  there  should  be  a  requirement  of  accuracy  to  two 
decimal  places  and  a requirement  to  use a  365  or  366  day  year.  This  will  require 
amendment  of  the  Annexes  to  the  Directive.  A  correction  would  also  have  been 
necessary  to  the  fourth  example  given  in  Annex  III  of  the  Directive  to  correct  a 

77  For  the  mathematical  aspects,  see  Professor  Seckelmann's  Study  of  the  method  of 

calculation  of APR  in  EEA states  -  Footnote  6  supra 

38 

miscalculation78  but  this  has  been  overtaken  by  the  recalculation  of  the  examples 
on  the  basis  of  accuracy  to  2  decimal  places  and  the  use  of  a  365  or  366  day 
year. 

134.  Regarding  the  elements  of  cost  to  be  included 
in  the  calculation,  the 
transposition  of  the  Directive  by  the  Member  States  has  led  to  a  position  where 
there  is  a  harmonised  minimum  level  of  protection  for  all  consumers  throughout 
the  European  Community  and  the  other  members  of  the  EEA  in  this  respect.  As 
Member  States  presently  include  almost  the  same  elements  in  their  calculation, 
and  as  any  differences  that  do  exist  are  minimal  in  nature,  it  is  not  proposed  that 
the  list  of  exemptions  in Article  1a(2)  should  be  amended  at  this  time. 

In  accordance  with  Article  1a(5)(b)  of  Directive  87/102,  as  amended  by 
This  will  implement  the 

135. 
Directive  90/88,  a  draft  Directive  is  being  proposed. 
changes  recommended  above79. 

136.  As  regards  any  other  substantive  elements  of  Directive  90/88/EEC,  any 
proposals 
together  with 
proposals  for  the  amendment  of  the  original  Consumer  Credit  Directive  87/10280. 

in  this  regard  would  be  considered 

for  amendments 

78 

79 

80 

A  mistake  was  made  in  this  calculation.  The  result  should  be  13.1855%  according  to 
spreadsheet  calculation.  This  mistake  in  no  way  affects  the  correctness  of  the  general 
formula, and the other examples are calculated correctly. 

It will  also  propose  the deletion  of Article  1a(3) of  the  Directive  as this  measure  has not 
been availed of by any Member State. 

A  Report  on  the  operation of  Directive 87/102 was  published  in  May  1995  and  the 
Commission  is currently  considering  reactions to this  Report.  Any subsequent  legislative 
proposal in this respect could include amendments to Directive 90/88. 

39 

(a) 

(b) 

(c) 

(d) 

(e) 

Annex  I  -  Articles  1 and  1a  of  Directive  87/102 
(as  amended  by  Directive  90/88) 

Article 1 

1.  This  Directive 
agreements. 

applies 

to 

credit 

2.  For  the  purposes  of this  Directive: 

accordance  with  the  mathematical 
formula  set  out  in Annex II. 

(b) 

Four  examples  of  the  method  of 
calculation  are  given  in Annex  III, by 
way  of illustration. 

'consumer'  means  a  natural  person  who, 
in  transactions  covered  by  this  Directive, 
for  purposes  which  can  be 
is  acting 
trade  or 
as  outside 
regarded 
profession  ; 

his 

2.  For  the  purpose  of  calculating  the  annua! 
percentage  rate of charge,  the "total  cost  of  the 
credit  to  the  consumer"  as  defined  in  Article 
1(2)(d)  shall  be  determined,  with  the  exception 
of the following  charges: 

'creditor'  means  a  natural  or  legal  person 
who  grants  credit  in  the  course  of  his 
trade,  business  or  profession,  or  a  group 
of  such  persons ; 

'credit  agreement'  means  an  agreement 
whereby  a  creditor  grants  or  promises  to 
grant  to  a consumer  a credit  in  the  form of 
a  deferred  payment,  a 
loan  or  other 
similar  financial  accommodation. 

for 

Agreements 
the  provision  on  a 
continuing  basis  of  a  service  or  a  utility, 
where  the  consumer  has  the  right  to  pay 
their 
for 
provision,  by  means  of  instalments,  are 
not  deemed  to  be  credit  agreements  for 
the  purpose  of this  Directive. 

the  duration  of 

them, 

for 

to 

'total  cost  of  credit 
the  consumer' 
means  all  the  costs,  including  interest  and 
other  charges,  which  the  consumer  has  to 
pay for  the  credit. 

the  credit 

total  cost  of 

'annual  percentage  rate  of  charge'  means 
the 
the 
consumer,  expressed  as  an  annual 
percentage  of  the  amount  of  the  credit 
granted  and  calculated  in  accordance  with 
Article  1a. 

to 

Article  1a 

(a) 

be 

shall 

p r e s e nt 

rate  of 
The  annual  percentage 
charge,  which 
that 
equivalent,  on  an  annual  basis,  to 
the 
commitments 
and  charges), 
agreed  by 
the  creditor  and 
borrower,  shall  be  calculated 

all 
repayments 
(loans, 
future  or  existing, 
the 
in 

v a l ue 

of 

(i) 

charges  payable  by  the  borrower  for  non 
compliance  with  any  of  his  commitments 
laid  down  in the credit  agreement; 

(ii)  charges  other  than  the  purchase  price 
which,  in  purchases  of  goods  or  services, 
the  consumer  is  obliged  to  pay  whether 
the transaction  is  paid  in cash  or  by  credit; 

(iii)  charges 

for 

receive 

towards 

payments 

funds  and 
the  transfer  of 
charges  for  keeping  an  account  intended 
to 
the 
reimbursement  of  the  credit  the  payment 
interest  and  other  charges  except 
of 
the  consumer  does  not  have 
where 
reasonable 
the 
matter  and  where  such  charges  are 
abnormally  high; 
this  provision  shall  not, 
however,  apply  to  charges  for  collection  of 
such 
payments, 
whether  made  in cash or  otherwise; 

freedom  of  choice 

reimbursements 

or 

in 

(iv)  membership  subscriptions  to  associations 
or  groups  and  arising  from  agreements 
separate  from  the  credit  agreement,  even 
though  such  subscriptions  have  an  effect 
on the credit  terms; 

(v)  charges 

for 

insurance  or  guarantees; 
included  are,  however,  those  designed  to 
in  the 
ensure  payment  to  the  creditor, 
event  of  the  death,  invalidity, 
illness  or 
unemployment  of  the  consumer,  of  a  sum 
equal  to  or  less  than  the  total  amount  of 
the  credit  together  with  relevant  interest 
to  be 
and  other  charges  which  have 
imposed  by  the  creditor  as  a  condition  for 
credit  being granted. 

3. 

(a)  Where  credit  transactions  referred 
to  in this  Directive  are  subject  to  the 
provisions  of  national  laws  in  force 

40 

(b) 

only  one  mathematical  formula  for 
the  annual  percentage 
calculating 
rate  of  charge  is  used  within  their 
territory. 

to 

Six  months  before  the  expiry  of  the 
time  limit  laid  down  in  point  (a)  the 
Commission  shall  submit 
the 
Council  a  report,  accompanied  by  a 
proposal,  which  will  make  it  possible 
in  the  light  of  experience,  to  apply  a 
single  Community  mathematical 
formula  for  calculating  the  annual 
percentage  rate  of charge. 

(c) 

The  Council  shall,  acting  by  a 
qualified  majority  on the  basis  of  the 
proposal  from  the  Commission,  take 
a decision  before  1 January  1996. 

in 

the 

the  amount  or 

In  the  case  of  credit  contracts  containing 
6. 
rate  of 
clauses  allowing  variations 
level  of  other 
interest  and 
charges  contained  in  the  annual  percentage 
rate  of  charge  but  unquantifiable  at  the  time 
when  it  is  calculated,  the  annual  percentage 
the 
rate  of  charge  shall  be  calculated  on 
assumption 
interest  and  other  charges 
remain  fixed  and  will  apply  until  the  end  of  the 
credit  contract. 

that 

necessary, 

7.  Where 
following 
assumptions  may  be  made  in  calculating  the 
annual  percentage  rate of charge: 

the 

there 

is  no 

timetable 

if  the  contract  does  not  specify  a  credit 
limit,  the  amount  of  credit  granted  shall  be 
equal  to  the  amount  fixed  by  the  relevant 
Member  State,  without  exceeding  a  figure 
equivalent  to  ECU 2 000. 
for 
fixed 
if 
repayment,  and  one  cannot  be  deduced 
from  the  terms  of  the  agreement  and  the 
means  for  repaying  the  credit  granted,  the 
duration  of  the  credit  shall  be  deemed  to 
be one  year. 
the 
unless  otherwise  specified,  where 
contract  provides 
than  one 
repayment  date,  the  credit  will  be  made 
available  and  the  repayments  made  at  the 
earliest 
the 
provided 
agreement. 

for  more 

time 

for 

in 

than 

and,  where 

those  described 
to  (v)  not 

impose 
on  1  March  1990  which 
the  annual 
limits  on 
maximum 
percentage  rate  of  charge  for  such 
transactions 
such 
provisions  permit  standard  costs 
in 
other 
paragraph  2(i) 
to  be 
included  in  those  maximum  limits, 
Member  States  may,  solely 
in 
respect  of  such 
transactions,  not 
the  aforementioned  costs 
include 
when 
annual 
calculating 
the 
percentage 
rate  of  charge,  as 
stipulated  in  this  Directive,  provided 
that  there  is  a  requirement,  in  the 
cases  mentioned  in  Article  3  and  in 
the 
the  credit  agreement, 
consumer  be 
the 
amount  and  inclusion  thereof  in  the 
payments  to  be made. 

that 
informed  of 

(b)  Member  States  may  no  longer  apply 
point  (a)  from  the  date  of  entry  into 
force  of 
the  single  mathematical 
formula  for  calculating  the  annual 
percentage  rate  of  charge  in  the 
the 
to 
Community, 
provisions  of  paragraph  5(c).  N 

pursuant 

4. 

(a) 

(b) 

5. 

(a) 

the 

The  annual  percentage 
rate  of 
charge  shall  be  calculated  at  the 
time 
is 
concluded,  without  prejudice  to  the 
provisions  of  Article  3  concerning 
advertisements  and special  offers. 

contract 

credit 

is  valid 

that 
for 

The  calculation  shall  be  made  on 
the  credit 
the  assumption 
contract 
the  period 
agreed  and  that  the  creditor  and  the 
consumer 
their  obligations 
under  the  terms  and  by  the  dates 
agreed. 

fulfil 

a 

transitional  measure, 
As 
notwithstanding 
the  provisions  of 
paragraph  1(a),  Member  States 
to  1  March  1990, 
which,  prior 
applied  legal  provisions  whereby  a 
mathematical  formula  different  from 
that  given  in  Annex  II could  be  used 
annual 
for 
rate,  of  charge,  may 
percentage 
continue 
formula 
that 
within  their  territory  for  a  period  of 
three  years  starting  from  1  January 
1993. 

c a l c u l a t i ng 

applying 

the 

Member  States  shall 
the 
appropriate  measures  to  ensure  that 

take 

41 

Annex  II 

National  Legislation  transposing  Directive  90/88/EEC 

Further  details  on  the  national  legislation  can  be  found  in  the  Report  prepared  by  Professor 
Seckelmann  on  the  Method  of calculation  of APR in  the  EEA States, available  from  DG XXIV. 

Belgium 
Transposing 
Legislation: 

Scope: 

Term used: 
Formula  used: 
Elements  of  cost: 

Other: 

Denmark 
Transposing 
Legislation: 

Scope: 

Term used: 
Formula  used: 
Elements  of cost 

la 

consommation 

relative  au  crédit  à 

Loi 
/  Wet  op  het 
consumentenkrediet  1991/1723  of  12.6.91,  supplemented  by  Arrêté 
Royal  relatif  aux  coûts  ... du  crédit  à la consommation  /  Koninklijk  besluit 
betreffende  kosten  ...  van  het  consumentenkrediet  1992/2311  of  4.8.92, 
both  of which  have  been amended  since. 
Most  kinds  of  credit  (including  mortgages  and  current  accounts), 
Wider  than  the 
marketing  of  credit,  activities  of  intermediaries... 
Directive, with  limits  on  interest  rates  and  lifespans  of  loans  and  specifies 
inadmissible  terms 
Taux  Annuel  Effectif  Global / Jaarlijkse  Kostenpercentage 
Equivalent  to  EC formula 

Open  list  of  elements  to  be  included. 
Same  exemptions  as 
in  Article  1a2 
reasonable  choice  is given. 
Other  legislation  on the  subject: 
Loi  1992/1833  of  6.7.92,  Arrêté  Royal  /  Koninklijk  besluit  1992/2905 
(Errata)  of  4.8.92,  Arrêté  Royal  /  Koninklijk  besluit  1992/2312  of  4.8.92, 
Arrêté  Royal  /  Koninklijk  besluit  1993/1226  of  27.4.93,  Arrêté  Royal  / 
Koninklijk  besluit  1993/1381  of  29.4.93 

Insurance  not  excluded, 
is  whether 

but  criterion 

lov  n*  284  of  29/04/92  and 

Lov  om  kreditaftaler  1990/398  of  13.6.90  amended  by  Lov  n*  322  of 
31.05.91, 
lov  n°  226  of  06.04.94, 
supplemented  by  Bekendtgorelse  n° 896 of 21.12.90  and  Bekentsgorelse 
970  of  07.12.92and  Bekendtgorelse  n°  497  of  13.06.94;  Lov  om 
maerkning  og  skiltning  med  pris  n°  395  of  13.6.90;  and  Bekendetgorelse 
n° 902  of  12.11.92 
Wider  than  the  Directive  -  deals  with  real  estate  loans  secured  by 
mortgage  (traded  as  bonds) 
ârlige  omkostninger  i procent 
EC  formula 

Same  exemptions  as  in  Article  1a2  though  more  comprehensive 
(account  and  transfer  costs  are  only  exempted  if  consumer  has 
reasonable  choice  and costs  are  not  excessive) 

Other: 

Germany 
Transposing 
Legislation: 

Other  legislation  on the  subject: 
Lov  1991/456  of  17.6.91  amended  by  Lov  1994/429  of  1.6.94; 
n°  322  of  31.05.91,  n°  284  of  29.04.92,  n°  226  of 
Bekendtgorelse 
06.04.94,  n°  1098  of  21.12.94,  n°  970  of  07.12.92  and  n"  1228  of 
21.12.92 

Erste VO  (von 03.04.92)  zur Anderung  der Preisangabenverordnung  (von 
14.3.85) 

42 

Scope: 

In  some  respects  wider  than  the  Directive,  with  regulations  on  default 
and  intermediaries. 
effektiver  Jahreszins  or  anfanglicher  effektiver  Jahreszins 

Term used: 
Formula  used:  Derogation  in Article  1a5a  - Staffelrechnung  (cascade  calculation) 
Elements  of  cost: 

Literal  transposition,  using  the  exemptions  in  article  1a2. 
Insurance 
which  does  not  secure  repayment  is  exempt,  whether  mandatory  or 
not. 

Other: 

Other  legislation  on  the  subject: 
14.3.85, 
Article 
Ausfuhrungshinweise  zu  §4  PAV of  18.12.92; Verbraucherkreditgesetz  of 
17.12.90, amended  27.4.93 

609a  BGB;  Preisangabenverordnung 

of 

Greece 
Transposing 
Legislation: 
Scope: 
Term used: 
Formula  used:  EC formula 
Elements  of  cost: 
Other: 

Ministerial  Decision  01-983  of  7.3.91 
As  in  Directive 
etisio  pragmatiko  epitokio 

As  in Article  1 a2 

Other  legislation  on the  subject: 
Decision  1993/524  of the  Committee  of  Money  and  Credit  of  the  Bank  of 
Greece,  of  8.4.93;  Acts  of  the  Governor  of  the  Bank  of  Greece  n° 
1993/2213  of  15.6.93;  n°  1993/2258  of  2.11.93;  n°  1994/2286  of  28.1.94 

Spain 
Transposing 
Legislation: 
Scope: 

Term  used: 
Formula  used: 
Elements  of cost 

Ley de crédito  al consumo  1995/7  of 23.3.95  and correction  12.5.87 
As  in  Directive,  but  interest  rate  and  total  cost  must  also  be  stated  for 
mortgages. 
tasa  anual équivalente  and  porcentage  anual de  cargas  financieras 
Equivalent  to  EC formula 

All  charges  are  included  in  the  rate,  including  mandatory  insurance 
charges  (and  non-mandatory  insurance  charges  are  not  listed  as 
exempted). 

Other: 

Other  legislation  on the  subject: 
Ley  1965/50  of  21.7.65;  Orden  Banco  de  Espana  of  16.6.88,  Ley 
1988/26  of  29.7.88;  Orden  1989/303  of  Min.  Economia  y  Haciendas  of 
12.12.89;  Circular  Banco  de  Espana  1990/8  of  7.9.90,  n°  1993/13  of 
21.12.93  and  1994/5  of 22.7.94;  Ley  1994/2  of  30.3.94,  Orden  Banco  de 
Espana  of  5.5.94; 

Directive  90/88  has  not  been transposed  in  France. 

France 
Transposing 
Legislation: 
Scope: 
taux  effectif  global 
Term used: 
Formula  used: 
--
Elements  of  cost: 
Other: 

By existing  legislation, all charges  are  included  in the  rate 

Other  legislation  on the  subject: 
Loi  1966/1010  of  28.12.66,  Loi  1978/22 of  10.1.78  amended  by  1979/596 
of  13.7.79;  Ordonnance  1986/71243  of  1.12.86;  Loi  1988/15  of  5.1.88; 
Décret  1988/293  of  31.3.88;  Loi  1989/1010  of  31.12.89;  Loi  1992/60  of 
18.1.92;  Décret  1985/944  of  8.9.85;  Loi  1993/949  of  26.7.93;  Décret  n* 
1978/372  of  17.3.78,  n*  1987/509  of  24.3.78;  n"  1988/293  of  25.3.88; 
Loi  1995/125  of  8.2.95 

43 

Ireland 
Transposing 
Legislation-
Scope: 
Term  used: 
Formula  used: 
Elements  of  cost: 
Other: 

1995 Consumer  Credit  Act,  28.7.95 
Wider  than the  Directive 
annual percentage  rate  of  charge 
EC formula 

Generally  the  same  as Art.  1a2 

Other  legislation  on the  subject: 
Consumer  Information  (Consumer  Credit)  Order  SI  1987/319 of  10.12.87 

Italy 
Transposing 
Legislation: 

Scope: 

Term  used: 
Formula  used. 
Elements  of  cost: 
Other: 

Legge  communitaria  1991/142  of  19.2.92;  Decreto  vista 
1992/142  of  8.7.92 
Wider  than  the  Directive  -  neither  loans  before  notaries  nor  loans  to  be 
repaid  by  4  instalments  in  12  months  are  not  exempted,  and  credit 
purchases  are  included. 
tasso  annuo  effettivo  globale 
EC formula 

legge 

la 

As  in Article  1a2.  Open  list of charges  to  be  included 

Other  legislation  on the  subject: 
Legge  1992/154  of  17.2.92;  Decreto  on  Legge  1992/154,  24.4.92; 
Instruzioni  della  Banca  d'ltalia 
legge  1992/154, 
24.4.92;  Legge  in  materia  bancaria  e creditizia  1993/385 

in  attuazione  della 

Luxembourg 
Transposing 
Legislation: 
Scope: 

Term  used: 
Formula  used: 
Elements  of  cost: 
Other: 

Règlement  Grand-Ducal  26.8.93 
As  in  Directive  but  credit  card  accounts  are  treated  the  same  as  other 
accounts 
taux  annuel effectif  global 
EC formula 

Same  as  in Article  1 a2 
Other  legislation  on the  subject: 
Loi  9.8.93;  Avant-projet  de  règlement  grand-ducal  déterminant 
les 
modalités  de  calcul  du  montant  de la  réduction  équitable  du  coût  total  de 
crédit 

Netherlands 
Transposing 
Legislation: 
Scope: 

Term  used: 
Formula  used: 
Elements  of cost 

Wet  op het  consumentenkrediet  4.7.90  Stb  1990/395 
Wider  than the  Directive  and very  detailed.  Regulation  of  intermediaries 
and obligation  on  lenders  to advise debtors.  Maximum  rates. 
effektief  kredietvergoedingspercentage  (op jaarbasis) 
Equivalent to  EC  formula 

Only  1a2(i)  &  (ii)  are  used. 
obligatory,  they  are  not exempted. 

If  account  fees  or  insurance  fees  are 

Other: 

Other  legislation  on the  subject: 
Besluit  n'  1991/515  and  1991/516  of  9.10.91;  n°  548  of  17.10.91,  n*  549 
of  16.10.91,  n*  550  of  18.10.91;  Regeling  1991/220  of  6.11.91;  Regeling 
register  vergunninghouders  Stcr  1991/220  of 6.11.91 

44 

Austria 
Transposing 
Legislation: 

Scope: 

Term used: 
Formula  used: 
Elements  of cost 
Other: 

13.07.93 

Bankwesengesetz  BGBL  n°  532  of 
Verbraucherkreditverordnung  n°  110 of  13.05.93 
Wider  than  the  Directive  in  some  respects.  No  form  of  credit  exempt  -
applies  to  real  estate  loans,  mortgages  and  loans  of  any  amount  or 
duration.  Certain  leasing  transactions  also  seen  as  being  equivalent  to 
hire-purchase. 
(dekursiver)  effektiver  and fiktiver  Jahreszinssatz 
Equivalent  to  EC formula 

(Section  VIII); 

Only  1a2(i)  & (iii)  are  used. 
360 day  year  used 
Other  legislation  on the  subject: 

Insurance  is  included  if  mandatory. 

Konsumentenschutzgesetz  1979/140  of  8.3.79,  amended  by  1993/247  of 
16.4.93;  Konkursordnungsnovelle  1993/974;  Gewerbeordnung  1994/194 

Portugal 
Transposing 
Legislation: 
Scope: 

Term used: 
Formula  used: 
Elements  of cost: 
Other: 

Decreto-Lei  1991/359  of  21.9.91 
Wider  than  the  Directive  in  the  range  of  credit  covered.  Mortgages  not 
covered. 
taxa  anual de encargos  efectiva  global 
EC formula 

Same  as  in Article  1a2. 

Intermediaries'  costs  included. 

Finland 
Transposing 
Legislation: 

Scope: 
Term used: 
Formula  used 

Kuluttajansuojalaki 
/  Konsumentskyddslag  1978/38  of  20.1.78,  as 
amended  by  1986/385  of  23.5.86,  1993/85  of  8.1.93  and  1994/16  of 
5.1.94:  Asetus  /  Fôrordning  1993/1602  of  30.12.93  as  amended  by 
1994/16  of 1.7.94 
Wder  than the  Directive  - includes  loans to  buy  homes  and  mortgages. 
todellinen  vuosikorko  / effektiv  rànta 
Derogation  in Article  1a5a.  Formula:  Decision  of  Ministry  of  Trade  and 
in  Chapter  7  of  the 
Industry  on  the  application  of  certain  provisions 
Consumer  Protection  Act  (1986/874  of  30.06.86  as  amended  by 
1994/661) 

Elements  of cost: 
Other: 

All charges,  except  for  non-mandatory  insurance,  are  included 

Other  legislation  on the  subject: 
Luottolaitoslaki  /  Kreditinstitutslag  1993/1607  of  30.12.93 

Sweden 
Transposing 
Legislation: 
Scope: 

Term used: 
Formula  used: 
Elements  of cost. 

Konsumentkreditlag  1992/830 
Wder  than  the  Directive  - covers  all forms  of  loans,  including  mortgages 
and those  connected with credit-purchases  and  current  accounts 
effectiv  rànta 
EC formula 

All  charges  are  included  (no  exemptions  are  listed though  in  practice 
Insurance  is  not  mentioned  but  if 
those  in  the  Directive  are  used). 
it  is mandatory,  must  be included. 

Other: 

Other  legislation  on the  subject: 
Guidelines  1992/4  for the  application  of  Konsumentendreditlag  1992/830; 
Executive  Order  1992/1010  of  22.10.92 

45 

United  Kingdom 
Transposing 
Legislation: 

Scope: 
Term used: 
Formula  used 
Elements  of cost: 
Other: 

1 9 7 4;  T he  C o n s u m er 

C o n s u m er  C r e d it  Act 
(Agreements)(Amendments)  Regulation  Statutory  Instrument  1984/1600 
of  22.10.94 
More  comprehensive  than the  Directive 
annual  percentage  rate  of  charge 
Equivalent to  EC formula 

C r e d it 

As  in Article  1a2.  All  mandatory  costs  included. 

Other  legislation  on the  subject: 
Consumer  Credit  Act  1974; The Consumer  Credit  Regulations  -  Statutory 
Instruments  1980/51  of  29.1.80,  1983/1553  of  3.11.83,  1983/1562  of 
3.11.83,  1983/1564  of  3.11.83,  1985/1192,  1989/596  of  14.4.89; 
1989/869  of 24.5.89;  1989/1125  of 6.7.89;  1989/1126  of  6.7.89 

Iceland 
Transposing 
Legislation: 

Scope: 
Term used: 
Formula  used: 
Elements  of cost 

Log  urn  neytendalan  1993/30,  amended  by  101/1993  -  consolidated  in 
Log  urn neytendalan  1994/121  of  21.9.94 
Hirepurchase  and  leasing  agreements  are  included 
ârleg  hlutfallstala  kostnaôar 
EC formula 

As  in Article  1a2.  All  costs,  including  non-mandatory  insurance,  are 
included. 

Other: 

Other  legislation  on the  subject: 
Regulgerô  1993/377  of 3.9.93  and  Regulgerô  1993/491  of  3.12.92 

Liechtenstein 
Transposing 
Legislation: 

vom 

22  Oktober 

Gesetz 
(Liechtensteinisches  Landesgesetzblatt  1993  n°50  von  9/3/93) 
Effektiver  Jahreszins 
EC  formula 

1992 

ùber 

den 

Konsumkredit 

Term  used: 
Formula  used: 
Elements  of  cost:  As  in Article  1a2 
Other: 

360  day  year  used 

Norway 
Transposing 
Legislation: 

Scope: 

Term used: 
Formula  used: 
Elements  of cost 
Other: 

Lov  om  kredittkjop  1985/82  of  21.6.85  as  amended;  Forskrift 
kredittkjopsloven  1986/1616  of  15.7.86;  Forskrift  1990/437  of  1.6.90 
Narrower  than  the  Directive  in  that  it  only  covers  purchase  credit,  but 
wider  in  that  only  immovable  property  is  exempt  -  covers  more  than 
consumer  purchases,  covers  wider  range  of current  accounts, 
effectiv  rente 
EC formula  (to  be  implemented  in  1996) 

til 

As  in Article  1a2 

Other  legislation  on the  subject: 
Lov  om 
amendment  4.12.92 

finansieringsvirksomnet  og 

finansinstitusjoner  1988/40  and 

46 

Annex  III 

For  the  references  to  the  German  and  French  formulae,  see  footnotes  46  and  50 
respectively. 

Formula  used  for  calculating  APR  in  Finland: 

Single  Credits: 

P= 

1 2 x 2 0 0 xR 

K  x (T + L) 

in which 
P= 
R  = 
K  = 
T  = 
L  = 

APR 
the  amount  of total  costs 
the  amount  of  initial  loan 
repayment  period expressed  in  months 
the  interval  between  repayments  expressed  in  months 

Current Accounts: 

100 x yearly credit  costs 

P  = 

typical  amount  of  credit 

[Provided  by the Consumer Ombudsman's  Office, Finland] 

47 

EXPLANATORY  MEMORANDUM 

Background  -  Directives  87/102/EEC  and  90/88/EEC 

1. 

2. 

3. 

In  1975,  the  Council  adopted  the  Preliminary  Programme  of  the  European 
Economic  Community  for  a  consumer  protection  policy\ 
in  which  they 
emphasised  the  fundamental  nature  of  the  consumer's  right  to  protection  of 
their  economic  interests,  and  urged  that  priority  be  given,  inter  alia,  to  the 
adoption of measures at Community  level to harmonise the general  conditions 
of consumer credit.  The Commission's original proposal on consumer  credit2 
was  amended3,  following  Parliament's  suggestions,  to  provide 
the 
establishment of a uniform method for the calculation of the annual percentage 
rate  of charge for  credit. 

for 

The Council adopted  Directive 87/102/EEC4 for the approximation  of the laws, 
regulations  and  administrative  provisions  of  the  Member  States  concerning 
consumer  credit,  on  22  December  1986.  The  ninth  recital  and  Article  5 of 
this Directive provided for the introduction of a Community method or methods 
of  calculating  the  'annual  percentage  rate of  charge'  for  credit.  However,  as 
the  elaboration  of  a  common  formula  for  the  calculation  of  the  'annual 
percentage rate of charge', and the elements to be includea  in this calculation, 
had  proved  contentious,  Directive  87/102  stated  that,  "pending  a decision  on 
a Community  method or methods of calculating the 'annual percentage  rate of 
charge', Member States should be able to retain existing methods or practices" 
and that the "total cost of credit to the consumer"  (Article 1.2d) and the  'annual 
percentage  rate of charge' (Article  1.2e)  should be determined  and  calculated 
in  accordance  with  the  provisions,  practices  and  methods  existing  in  the 
Member  States. 

Following  discussions with government  experts, the  Commission  presented a 
proposal for a Directive5.  The  European  Parliament6  and the  Economic and 
Social  Committee7  recommended  the  regulation  not  only  of  the  mathematical 
aspects  but also of the elements of cost to be included  in the calculation.  As 
most  Member  States were willing to adopt the  actuarial  method  of  calculation 
and  were  also  willing  to  deal  with  the  elements  of  cost  to  be  included,  an 

1  OJ C 92  25.04.75 

2 

OJ C 80 27.03.79  p.4 

3  OJ  C  183  10.07.84 

4  O JL  42  12.2.87 

5  OJ C  155  14.6.88  p.  10 

6  EP  Report A2-418/88 of  06.03.89;  EP  Resolution  of  15.03.89 

7  ECOSOC  Opinion, OJ C 337 31.12.88 p.1 

<h 

4. 

5. 

6. 

7. 

8. 

amended  proposal  dealing  with  both  aspects  was  presented  in  19898. 

Directive  90/88/EEC  was  adopted  on  22  February  1990  and  introduced  a 
Community  method  of  calculating  the  'annual  percentage  rate  of  charge'  for 
consumer credit and defined the credit cost items to be used in the calculation 
by  indicating  those  costs  which  were  not  to  be  taken  into  account. 
All 
Member  States9 were to ensure, at  least, that  only one  mathematical  formula 
for the  calculation  was  in use  in their territory  for that  purpose. 

For a transitional period until  1 January  1996, those Member  States which, on 
a legislative  basis, used a different  mathematical formula for the calculation of 
the 'annual percentage  rate of charge' (prior to  1 March  1990) were  permitted 
to  continue  to  do so10. 

Article  1a(5)(b) of Directive  87/102 (as added by  Directive  90/88)  requires  the 
Commission to present to the Council "a Report, accompanied  by a proposal" 
which will make it possible to apply a single Community  mathematical  formula 
for  calculating  the  'annual  percentage  rate  of charge'. 

The Commission  has  prepared a Report on the operation  of Directive  90/8811 
which  explains  in  more  detail  the  reasons  for  the  proposals  for  amendment 
presented  below.  This  Report  is based on a study  prepared  by a consultant 
expert  in  financial  mathematics12,  on  studies  of  the  transposition  of  the 
Directive  into  domestic  law13  and,  particularly,  contacts  with  government 
experts14. 

While Article  1a(5)(c) states143 that the Council shall, acting on the basis of the 
Commission's  proposal,  "take  a decision", this  is  not  a  'Decision'  as  defined 
by Article  189 of the Treaty  but  rather,  since  its objective  would  be to  require 
This  interpretation  is  in 
Member  States  to  change  their  laws,  a  Directive. 

OJC  155 23.06.89  p.4 

Directive  90/88 was  incorporated  into the Agreement  on the  European  Economic  Area  (EEA) 
and the  Report  (see footnote  11 infra)  therefore covers  Iceland,  Liechtenstein  and  Norway  as 
well  as the  15  members  of the  European  Union 

Article  1a(5)(a)  of  Directive  87/102  (as added  by  Directive  90/88) 

COM(96)79 

Professor  Seckelmann  has  prepared  a  study  on  the  Methods  of calculation  in  the  European 
Economic Area  of the Annual  Percentage  Rate of  Charge (available  from  DG XXIV) 

Footnote  3  of  COM(95)117,  Report  on  the  operation  of  Directive  87/102/EEC  on  the 
approximation  of  the  laws,  regulations  and  administrative provisions  of  the  Member  States 
concerning consumer credit 

Meetings were  held in Brussels in April  1995 and January  1996, with continued direct  contacts 
in the  intervening  months. 
The  French  and  Italian versions  of the  Directive  do  not  refer  to a "decision" 

9 

10 

11 

12 

13 

14 

14a 

Eto 

accord with that previously given to Article 5 of Directive 87/102 which referred 
to  a  'decision'  on the  introduction  of  a  Community  method  -  the  method  was 
in fact  introduced  by a Directive  (Directive  90/88/EEC). 

Proposals  for  the  amendment  of  Directive  87/102  (as  amended  by  Directive 
90/88): 

9. 

10. 

As  has  been  explained  in  more  detail  in  the  Report  on  the  operation  of 
Directive  90/8815,  there  are  almost  as  many  denominations  for  the  Annual 
Percentage  Rate of Charge  in use  as there  are  Member  States. 

this  reason,  in  the 

interests  of  transparency  and  of 

For  the  same  reasons  that  it  is  desirable,  in  order  to  ensure  the  proper 
functioning  of the  Internal  Market  and  to  ensure  a  high  level  of  protection  of 
consumers, that  one single  method  be  used for  the  calculation  of the  annual 
percentage  rate of charge  be used throughout  the  European  Community  and 
the  other  members  of the  EEA, it is also desirable  that  consumers  should  be 
able to recognise the terms used in other Member  States to  indicate this rate. 
increased 
For 
comprehension  by  consumers,  it  is  desirable  that  a  common  feature  be 
included  in  order  to  enable  consumers  to  recognise  these  terms  as  being 
equivalent to the one in use in their own Member States.  Following discussions 
with  government  experts,  and 
the  principles  of 
proportionality and subsidiarity, it is not proposed to suggest the  harmonisation 
of  the  different  terms  in the different  languages,  but  rather  to  require  the  use 
in  all  consumer  credit 
of  a  symbol 
advertisements  and written agreements with consumers.  This symbol will be 
identical  in  each  Member  State.  This  will  entail  the  amendment  of Article  3 
and 4(2) of Directive 87/102 (as amended by Directive 90/88) in order to require 
the use of a sumbol in addition to the existing term "annual percentage  rate of 
charge"  in  all  consumer  credit  advertisements  and  written  agreements  with 
consumers. 

in  addition  to  the  existing 

in  accordance  with 

term 

11. 

In order to harmonise the different existing  language versions  of the Directive, 
the  amendment  of  Article  1a(1)(a)  in  the  English  and  Greek  language 
versions  of the  Directive  is required16.  The  article  will  now  read  as  follows 
(identical  to the  French  language  version): 

The annual percentage rate  of charge,  which shall  be  that rate,  on an 
annual  basis,  which  equalises  the  present  value  of  all  commitments 
(loans,  repayments  and  charges),  future  or  existing,  agreed  by  the 
creditor  and  the borrower,  shall  be  calculated  in  accordance  with  the 
mathematical  formula set out in Annex  II. 

15 

16 

Paragraphs  113 -  120 of the  Report 

This amendment  has been discussed with and agreed  by Ireland and the  United  Kingdom (as 
far  as the words  "that  rate... which equalises" are concerned). 

5Ï 

and the proposed wording for the Greek version of Article  1 a(1)(a)  is as follows: 

"TO  OVVOXl  KÔ €TT)0~ LO 1TpOty\JaT L  KO  1TOOOOTÔ  6 7T L (Sap V V 07] Ç ITOU 6 £ LOù3V€  L 
oe  eTf\o'ioL  (3aorj  TLÇ 
^eXXovTLKù)vviToxpeù)oeix)v(ôoiveiG)v, 
TTOV  éxovv 
KOLTOLVOlXbiTT),  VÏÏOX OJ L  f  6 TOL L  O V P0W V 01  Ue  TO  \lŒÔ T]\l0LT L K. O  TV1TO  TTOV 
•ïïOtpOLT L de TOtl  OTO 7TOL p Ôt p T7][\a. I I ". 

f) 
eCocfrXijoeuv  KŒL  eir  L(3ocpv  voeuv) 
i  f  ope  vo) 

irocpovoeç  a £ i eç  TOV  ovvôXov 

otvotXr)<fid et  airô 

TWV  rpexouoûv 

TO  ôaveLUTf) 

(ôave 

non 

TO 

12. 

13. 

Article  1a(3)  of the  Directive  permitted  Member  States  who  had  national  laws 
in  force  on  1  March  1990  which  imposed  maximum  limits  on  the  annual 
percentage  rate  of charge  and which  excluded  costs  other  than  those  referred 
to  in  Article  1a(2),  to  continue  to  rely  on  these  provisions  (provided  that  the 
consumer  is informed  of these  charges).  As  no  Member  State  has  made  use 
In  any  event,  it 
of  this  possibility,  it  is  appropriate to  delete  Article  1a(3). 
would  be  necessary  to  delete  this  Article  once  the  formula  was  confirmed  as 
proposed  by  the  present  proposal  for  a  Directive. 

in  the  Report  on  the  Operation  of  Directive 
As  has  been  demonstrated 
90/88/EEC,  the  formula  contained  in  Annex  II  of  the  Directive  is  completely 
correct  and  should  be  confirmed  throughout  the  European  Economic  Area. 
This  will  entail  the  replacement,  in  Germany,  France  and  Finland,  of  the 
formulae  presently  in  use.  Neither  the  German  nor  the  French  formulae  use 
exponential  calculation,  resulting  in  a situation  where  neither  can  apply  a  one 
year  compounding  period  for  all  circumstances. 
The  main  differences  in 
relation to the  German  formula17  relate to short term  credit,  a form  increasingly 
used  e.g.  credit  cards. 
Indeed,  some  German  banks  already  use  the  EC 
formula  for  calculating  rebates  because  the  older  system  is  inapplicable  in 
cases  of  unequal  instalments.  With  the  French18 formula, the  monthly  rate  is 
converted  to  an  annual  rate  by  multiplying  by  twelve.  This  is  misleading  as  it 
is  not  based  on  an  annual  compounding  period  and  thus  leads  to  very 
significant  differences  with  the  EC formula.  French  consumer  credit  contracts 
thus  appear  artificially  more  favourable  to  consumers  than  those  of  other 
Member  States.  While the  German  system  is mathematically  inconsistent  and 
creates  artificial  differences  in calculations,  it  has  only  modest  effects  on  most 
ordinary  instalment  credit.  The  French  system  deviates  so  significantly  as  to 
mislead  not  only  non-French  consumers  but  also  French  consumers. 

14 

As  an  example,  in  a  loan  of  1000  ECU, with  10  ECU  interest  each  month,  the 
following  results  are  achieved  using  the  different  formulae: 

17  See paragraphs 64-75 of the Report  on Directive  90/88 

18  See  paragraphs  76-81 of  the  Report  on Directive  90/88 

5X 

Term 
(months) 

6 

12 

18 

24 

48 

Cost 

German  method 

EC  method 

French  method 

60 

120 

180 

240 

480 

21.49 

24.66 

24.27 

24.34 

23.09 

22.29 

23.70 

24.00 

23.84 

22.86 

20.29 

21.46 

21.65 

21.58 

20.75 

15 

16. 

The German deviation  is signficant for  periods  of less than one year while the 
French  deviation  is more  general and serious. 

The advantages of the EC formula19 are that mathematically, the use of a single 
formula is the only way to guarantee that the price represents equal conditions; 
that  it enables  consumers to shop across  borders  in the Single  Market; that it 
simplifies  the  legal framework  for  consumer  credit  in different  Member  States 
and promotes consistency  in the national transposition measures.  Production 
costs for  software  companies  and financial  institutions will  be  reduced  due to 
the economies of scale provided by the use of a single formula throughout the 
Single Market.  The potential cost of adapting computer programmes and price 
structures  to  handle  the  EC  formula  is  not  a  striking  argument  as  banks  in 
those  Member  States which  already  use the formula  have  already  made  this 
investment.  Those banks that will now be obliged to change frequently  adapt 
their  programmes to take account of case law and administrative  rules on the 
subject  and,  in  addition,  already  use  the  EC  formula  for  some  (internal) 
calculations. 

It  is therefore  necessary  to  delete  Article  1a(5),  the Article  which  provided  a 
derogation  until 31  December  1995  (used  by Germany  and  Finland)  to  those 
Member  States who wished to  retain  a different  method for the  calculation  of 
the  annual  percentage  rate  of  charge. 
As  has  been  demonstrated  in the 
Report  on  the  Operation  of  Directive  90/88/EEC,  the  formula  contained  in 
Annex  II  of  the  Directive  should  be  confirmed  throughout  the  European 
Community  and other members  of the  EEA.  As a result, Article  1a(5)(a)  (the 
derogation),  Article  1a(5)(b)  (the  reference  to  the  Report  and  this  legislative 
proposal)  and Article 1a(5)(c) (the reference to the decision to be taken by the 
The 
Council),  are  no  longer  necessary  and  should  be  deleted. 
confirmation  of  the  formula  contained  in  Annex  II  will  entail  changes  in  the 
legislation  presently  in force  in Germany,  France  and  Finland. 

17. 

Linguistic  changes  have  also  been proposed  to the wording  of the  definitions 
in Annex  II in certain language versions - namely  Spanish, French and Dutch. 

18.  While the  Directive does not at present define the degree of accuracy  required 

19  See  paragraphs  82 - 93 of the  Report  on  Directive  90/88 

55 

in  the  calculation  of  the  annual  percentage  rate  of  charge,  the  examples  in 
Annex  III presuppose accuracy to at least one decimal place.  Most  Member 
States require accuracy to at least one decimal place.  As the scope of many 
Member States'consumer credit legislation covers higher amounts and longer 
terms than  in the Directive, the differences  as a result of the level of accuracy 
become important, especially in those Member States which include  mortgage 
credit  in  the  scope  of  their  legislation. 
It  is  therefore  necessary  that 
accuracy to two decimal places should be required (though accuracy to one 
decimal  place  could  be  allowed  where  the  difference  is  less  than  ECU  50). 
This would  also entail  amendment  of Annex  II and  of the  examples  in Annex 

19. 

20. 

21. 

The  Directive  states  in Annex  II that  intervals  shall  be expressed  in "years  or 
in fractions of a year".  This dates from the pre-computer  era when, for ease 
of calculation, a year was  defined as  having  12 equal  months,  52 weeks  and 
360 days.  Compounding periods were likewise set at full months  or years  in 
order to make end-of-year calculations possible.  This leads to situations where 
the 31st day of some months  is ignored and 2 days  are added to  February  in 
order to  arrive at 12 equal 30 day months. 
In practice, most  Member  States 
(with the exception  of Germany, Austria, Sweden, Liechtenstein  and  Norway) 
have  introduced  the  correct  calendar  into  their  calculations.  Even  in  those 
Member  States,  the  correct  calendar  year  of  365  days  is  used  for  certain 
calculations.  Use of a 365 day year  is, moreover,  in conformity with  computer 
programmes all over the world - computers automatically calculate on the basis 
of  a  365  day  year  and  the  number  of  days  in  a  given  time  period.  As  the 
differences  in the rates for  credit calculated  on a 360 day year  and  a 365  day 
year can be significant, it is necessary that Annex II should be amended to 
state that a year is presumed to have 365 or 366 days20.  This would also 
entail amendment  of Annex  II and  of the  examples  in Annex III. 

This  proposal  would,  in  practice,  only  affect  Germany,  Austria,  Sweden, 
Liechtenstein  and  Norway,  who  presently  use  a  360  day  year  in  their 
calculations. 

A  miscalculation  in the  fourth  example  in Annex  III  also  needed  correction  -
instead  of  13.21%  the  answer  should  have  been  13.1855  or  13.19%.  This 
correction  has, however,  been overtaken  by the  recalculation  of the  examples 
on the  basis of accuracy to 2 decimal places and the  use of a 365 or 366 day 
year. 

22.  No proposals  are put forward at this time concerning the list  in Article  1a(2)  of 
the  Directive  (the elements  of cost to  be excluded from the  calculation  of the 
annual  percentage  rate  of  charge)  as  most  Member  States  include the  same 
elements  and such differences  as do exist are minimal in nature.  As  regards 
amendment  of  any  other  substantive  elements  of  Directive  90/88/EEC,  any 

20  While  Denmark  uses a year  of  365.25  days,  averaged  over 4 years,  in  order to take  account 
of  leap  years,  this  is not  proposed  for the  Directive  as the  difference  would  not  be  significant 
enough  to  be  noticed  in a calculation which  uses accuracy  to 2 decimal  places. 

9i 

proposals  in this  regard  would  be  considered  together  with  proposals  for  the 
amendment of the original Consumer  Credit Directive, Directive 87/102/EEC21. 

Legal situation  pending the adoption of the  proposed  Directive 

23. 

24. 

As  a  result  of  changed  circumstances  following  the  enlargement  of  the 
European  Union  to  include  Austria,  Finland  and  Sweden,  and  the  delayed 
transposition  of  Directives  87/102  and  90/88  by  certain  Member  States,  the 
Commission  was  unable  to  present  the  Report  and  proposal  mentioned  in 
Article  1 a(5)(b) by 1 July  1995, and the Council and Parliament were unable to 
adopt  the  proposed  draft  Directive  by  1 January  1996. 

Article  1a(5)(a)  of Directive 87/102 permitted  Member  States, as a transitional 
measure, to continue to apply  legal provisions for the calculation of the global 
annual  effective  rate  different  to  those  in  the  Directive  for  a  period  of  three 
years  starting  from  1  January  1993  (i.e.  until  January  1  1996). 
The 
Commission interprets Article 1a(5)(b)  as an implicit prolongation of this period 
until  the  adoption  of the  Directive  referred  to  in Article  1a(5)(c).  Germany, 
France  and  Finland  may  therefore  continue  to  apply  existing  legal  provisions 
different  to  those  in  Annex  II  of  Directive  87/102  until  the  adoption  of  the 
proposed  Directive. 

21  A  Report  on the  operation  of which  was  published  in  May  1995  [COM(95)117 of  11.05.95], 
reactions  to  which  are  currently  under  consideration  by  the  Commission.  Any  subsequent 
legislative  proposal  in this  respect  could  include  amendments  to  Directive  90/88. 

55 

DIRECTIVE  96/ 

OF  THE  EUROPEAN  PARLIAMENT  AND  THE  COUNCIL 

of 

1996 

amending  Directives  87/102  (as  amended  by  Directive  90/88)  for  the 
approximation  of  the  laws,  regulations  and  administrative  provisions  of  the 
Member  States  concerning  consumer  credit 

T HE  EUROPEAN  PARLIAMENT  AND  THE  COUNCIL  OF  THE  EUROPEAN  UNION, 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in  particular 
Article  100a  thereof, 

Having  regard  to  the  proposal  of  the  Commission1, 

Having  regard  to  the  opinion  of  the  Economic  and  Social  Committee2, 

Acting  in  accordance  with  the  procedure  laid  down  in  Article  189b  of  the  Treaty3, 

Whereas  it  is  desirable,  in  order  to  promote  the  establishment  and  functioning  of  the 
internal  market  and  to  ensure  that  consumers  benefit  from  a  high  level  of  protection, 
that  one  method  of  calculating  the  annual  percentage  rate  of  charge  should  be  used 
throughout  the  European  Community, 

Whereas  Article  5 of  Council  Directive  87/102/EEC4  provides  for the  introduction  of  a 
Community  method  or  methods  of  calculating  the  annual  percentage  rate  of  charge 
for  consumer  credit; 

Whereas,  in  order  to  introduce  this  single  method,  it  is  desirable  to  draw  up  a  single 
mathematical  formula  for  calculating  the  annual  percentage  rate  of  charge  and  for 
determining  the credit cost items to be used in the calculation  by indicating those  costs 
which  must  not  be  taken  into  account, 

Whereas  Annex  II  of  Directive  90/88/EEC  (5)  introduced  a  mathematical  formula  for 
the  calculation  of  the  annual  percentage  rate  of  charge  and  Article  1.2  of  Directive 
90/88  provided  the  charges  to  be  excluded  from  the  calculation  of  the  'total  cost  of 
credit  to  the  consumer', 

Whereas  during  a  transitional  period  of  three  years  from  1  January  1993,  Member 
States  which  prior  to  1 March  1990  applied  laws  which  permitted  the  use  of  another 
mathematical  formula  for  calculating  the  annual  percentage  rate  of  charge,  were 
permitted  to  continue  to  apply  such  laws, 

4 

5 

OJ  n° L42  12.2.87  p. 48 

OJ  L61  10.3.90  p.  14 

5f 

Whereas the  Commission  has submitted  a Report  to the  Council  (6) which  makes  it 
possible, in the light of experience, to apply a single Community mathematical formula 
for  calculating  the  annual  percentage  rate of charge, 

Whereas  no  Member  State  has  made  use  of Article  1a(3)  of the  Directive  by  which 
certain  costs  were  excluded  from  the  calculation  of  the  annual  percentage  rate  of 
charge  in certain  Member  States,  it  has  become  obsolete, 

Whereas  accuracy  to  two  decimal  places  and  the  use  of  a  365  or  366  day  year  is 
necessary, 

Whereas  it is desirable that consumers  should  be able to  recognise  the terms  used 
in different Member States to indicate the 'annual percentage rate of charge', and that 
the  use  of a common  symbol, in addition  to the existing  term, should  be  mandatory 
in  all  consumer  credit  advertisements  and  written  agreements  with  consumers 
throughout  the  European  Community, 

HAVE  ADOPTED  THIS  DIRECTIVE: 

COM(96)79 

3 

Article  1 

Whenever  the  term  "annual  percentage  rate  of  charge",  or  the  equivalent  term  in  another 
Community  language,  is  used  as  required  by  Directive  87/102,  it  shall  be  accompanied  by  the 
following  symbol: 

it 
it  w 

it 
it  % 
it 

it 

it 
it 
it 

it^it 

Article  2 

Article  1a(1)(a)  shall  be  replaced  by  the  following: 

in  the  Greek  language  version  of  the  Directive: 

eTijoLO 
TLÇ 

"To  OVVOXIKO 
eTf)oia.  Pâorj 
[ieXXovT  L  KQV  VTroxpcûoeuv 
ixovv 
vnoXoyi 
Trapâprr/Uck;  I I ". 

f e ra  i  avU^wva 

' 

irapoûoeç 

a£ïeç 

irpocy\JaT L  KO  TTOOOCTO  eir ifiâpu  vorjç  TTOV  e^toûvei 

ce 
f) 
(ôav  e ïuv,  e^o4>Xf)oeuiv  KÙ L  eir tfiotpv  voeojv)  TTOV 
non  TO  (ôave  L f ôUe v o)  KaTcuvaXuTfj, 
[iaôr}[iaT  L  KO  TOTTO  TTOU  uapaTÏ  6 e Ta  L  OTO 

TÙJV  Tpexovoœv 

ovvôXov 

\ie  TO 

rov 

avaXri(f)d  et  otirô  TO  botveiOTf] 

in  the  English  language  version  of  the  Directive: 

The  annual percentage  rate of charge  which  she!! be that  rate, on an annual  basis  which 
equalises  the  present  value  of all commitments  (loans,  repayments  and  charges),  future 
or  existing,  agreed  by  the  creditor  and  the  borrower,  shall  be  calculated  in  accordance 
with  the  mathematical  formula  set  out  in  Annex  (II).' 

Article  1a(3)  shall  be  deleted. 

Article  1a(5)  shall  be  deleted. 

Article  3 

Article  4 

Article  5 

Article  3  shall  be  amended  as  follows: 

Without  prejudice  to  Council  Directive  84/450/EEC  of  10  September  1984  relating  to 
the approximation of the laws, regulations  and administrative  provisions of the  Member 
States  concerning  misleading  advertising, as amended  by Council  Directive  /96  of.... 
1996  concerning  comparative  advertising,  and  to  the  rules  and  principles  applicable 
to  unfair  advertising,  any  advertisement,  or  any  offer  which  is  displayed  at  business 
premises,  in which  a  person  offers  credit  or  offers  to  arrange  a credit  agreement  and 
in which  a rate of  interest  or any  figures  relating to the  cost  of the credit  are  indicated, 
shall  also  include  a statement  of the  annual  percentage  rate of charge,  accompanied 

5f 

by the symbol as mentioned in Article 1 of this Directive, by means of a representative 
example  if no other  means  is  practicable. 

Article 6 

Article 4(2)(a)  shall  be amended  as follows: 

(a) 

a  statement  of  the  annual  percentage  rate  of  charge,  accompanied  by  the 
symbol  as mentioned  in Article  1 of this  Directive 

Annex  I attached  hereto  shall  become  Annex  II, replacing  Annex  II of  Directive  87/102  (as 
amended  by  Directive  90/88). 

Article 7 

Annex  II attached  hereto shall become Annex  III, replacing Annex  III of  Directive 87/102  (as 
amended  by  Directive 90/88). 

Article 8 

Article 9 

1. 

Member States shall bring into force the laws, regulations and administrative provisions 
necessary for them to comply with this Directive no later than 31 December  1996 and 
shall  inform the  Commission  thereof. 

When  Member  States  adopt  those  measures,  they  shall  include  references  to  this 
Directive  or  shall accompany  them  with  such  references  on their  official  publication. 
The  Member  States  shall  lay  down  the  manner  in  which  such  references  shall  be 
made. 

2. 

The Member States shall communicate to the Commission the texts of the  provisions 
of  national  law which they  adopt  in the field governed  by this  Directive. 

This  Directive  is  addressed to the  Member  States 

Article 10 

Done  at  Brussels, 

1996 

L 

Annex  I 

Annex  II 

THE  BASIC  EQUATION  EXPRESSING  THE  EQUIVALENCE  OF  LOANS  ON  THE  ONE 
HAND AND  REPAYMENTS  AND CHARGES  ON THE  OTHER 

K  = m 
E 
A f -1 

A 
-^-7 
(1  +  / ) '* 

K'  = m' 
-  E 
fC  =1 

A* 

* 
(1  +  /)'*• 

Meaning  of  letters  and symbols: 

K 

K' 

AK 

A\- 

J2 

is the  number  of a loan 

is the  number  of a repayment  or a payment  of charges 

is the  amount  of loan  number K 

is the  amount  of repayment  number  K' 

represents  a sum 

m 

is the  number  of the  last  loan 

m ' 

is the  number of the  last  repayment  or  payment  of  charges 

tK 

tK- 

i 

is the  interval, expressed  in years  and fractions  of a year,  between the date  of  loan 
No.  1 and those  of subsequent  loans  Nos. 2 to m 

is the  interval, expressed  in years  and  fractions  of a year,  between the date  of  loan 
No.  1 and those  of  repayments  or payments  of  charges  Nos.  1 to  m' 

is  the  percentage  rate  that  can  be  calculated  (either  by  algebra,  by  successive 
approximations, or by a computer programme) where the other terms in the equation 
are  known from the  contract or  otherwise. 

Remarks 

(a) 

(b) 
(c) 

(d) 

The amounts paid by both parties at different times shall not necessarily be equal and 
shall  not  necessarily  be  paid at equal  intervals 
The  starting date  shall  be that  of the  first  loan 
Intervals  between  dates  used  in  the  calculations  shall  be  expressed  in  years  or  in 
fractions  of a year.  A  year  is presumed to  have  365  or 366 days 
The result of the calculation shall be expressed with an accuracy of 2 decimal places. 
If the  figure  at the third decimal  place  is greater than  or equal to  5, the figure  at the 
second  decimal  place  shall  be increased  by one. 

61 

Annex  II 

"Annex  III:  EXAMPLES  OF  CALCULATION 

First  example 

Sum  loaned:  S =  1000  ECU on January  1 1994 

It is repaid  in a single payment of 1200  ECU made on June 30  1995 (547 days after the date 
of the  loan) 

1 2^ 

647 
(1+4 365 

The  equation  becomes: 

1000  = 

or 

547 

(1+4 365 

~  1.2 

1 + i= 

i = 

1.129444207... 
0.129444207... 

This  amount  will be rounded  to 12.94% 

Second  example 

The sum loaned is S = 1000 ECU but the creditor retains 50 ECU for administrative expenses, 
so that the  loan  is in fact 950  ECU;  the  repayment  of  1200  ECU, as in the first example,  is 
again  made  on June  30 1995. 

The  equation  becomes: 

547 
365 

= 1 ,2 

1200 
547 
365 

(1+J) 

950  = 

or 

(u& 
I1 +0 

=1200 
950 

=1 I 2 631 57 

1  +  i = 
i = 

1.1688996... 
0.1688996  .. 

rounded  to  16.89% 

a 

Third  example 

The  SLm loaned  is  1000 ECU, repayable  in two  amounts, each  of 600  ECU, paid  after  one 
and two  years  respectively. 

The  equation  becomes: 

1000=-

600 
1 +/ 

600 
(1  +/)730/365 

600  600 
1 +/ 

(1 + /)2 

It is solved  by algebra and produces  i = 0.1306623,  rounded to  13.07% 

Fourth  example 

The  sum  loaned  is  1000  ECU,  on  January  1  1994,  and  the  amounts  to  be  paid  by  the 
borrower are: 

After  3  months 
After  6  months 
After  12  months 

(0.25 years ) 
(0.5 years  ) 
(1 year ) 

272  ECU 
272  ECU 
544  ECU 

Total 

1088  ECU 

The  equation  becomes: 

1 0 0 0 = ^ ^+. 
89 
(1+/)365 

2 72 

5 44 

180 
(1+/)365 

365 
(1+/)365 

This  equation  allows  i  to  be  calculated  by  successive  approximations,  which  can  be 
programmed on a pocket  calculator 

The  result is: 

i  = 0.13226,  rounded to  13.23% 

C2. 

ISSN  0254-1475 

COM(96) 79  final 

DOCUMENTS 

EN 

10  06 

Catalogue number  : CB-CO-96-090-EN-C 

ISBN 92-78-00976-8 

Office for Official  Publications of the European Communities 

L-2985 Luxembourg 

£s